<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934 For the Fiscal Year Ending December 31, 1999

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (No fee required) For the transition period from
     _______ to _______

                         Commission File No. 000-13059

                                CERADYNE, INC.
                                --------------
            (Exact name of Registrant as specified in its charter)

                Delaware                               33-0055414
                --------                               ----------
      (State or other jurisdiction of         (I.R.S. Employer Identifica-
       incorporation or organization)                 tion Number)


              3169 Red Hill Avenue, Costa Mesa, California 92626
              --------------------------------------------------
                   (Address of principal executive offices)


      Registrant's telephone number, including area code:  (714) 549-0421
                                                           --------------

       Securities registered pursuant to Section 12(b) of the Act:  None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.01 par value
                               (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES  X   NO ___
    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ( X )

The aggregate market value (based on the closing price at which stock was sold)
of the voting shares held by non-affiliates of the registrant as of March 3,
2000 was $49,902,624.

As of March 3, 2000, the number of shares of the registrant's Common Stock
outstanding was 8,099,048.

DOCUMENTS INCORPORATED BY REFERENCE:  None
<PAGE>

                                 PART I

This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.  The Company's actual results may differ
materially from the results projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Item 1 - Business," including the section therein entitled
"Risk Factors," and in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Item 1.  Business
         --------

Introduction

Ceradyne, Inc. ("Ceradyne" or the "Company") develops, manufactures and markets
advanced technical ceramic products and components for industrial, defense,
consumer and microwave applications.  In many high performance applications,
products made of advanced technical ceramics meet specifications that similar
products made of metals or plastics cannot achieve.  Advanced technical ceramics
can withstand extremely high temperatures, combine hardness with light weight,
are highly resistant to corrosion and wear, and have excellent electrical
insulation capability and other special electronic properties.

Ceradyne's technology was originally developed primarily for defense and
aerospace applications which have historically represented a substantial portion
of its business.  However, the Company has diversified its product lines on the
development of new applications and markets, domestic and international, for its
advanced technical ceramic technology, while continuing to serve its historical
customer base which continues to account for a substantial portion of the
Company's business.

The Company continues to derive a substantial portion of its revenues from its
traditional products, such as lightweight ceramic armor for military helicopters
and microwave tube products.  However, newer products developed or being
developed by the Company for defense, industrial and consumer applications have
represented a growing share of its business.  Examples of these newer products
include (i) large corrosion resistant ceramic components sold to semiconductor
equipment manufacturers; (ii) lightweight ceramic armor vests for military
personnel; (iii) a modified translucent ceramic orthodontic bracket, which is
sold to Unitek Corporation, a subsidiary of 3M, under an exclusive marketing
agreement and marketed by Unitek under its brand name "Clarity", (iv) wear
resistant components for industrial machinery, such as paper making equipment,
made from the Company's Ceralloy(R) 147 silicon nitride advanced technical
ceramic; (v) missile nose cones or radomes for the defense industry, (vi)
advanced technical ceramic components used on diesel engines, and (vii)
lightweight ceramic applique armor for ground combat vehicles.

The Company has a strategic relationship with the Ford Motor Company, pursuant
to which Ford acquired a 14.9% equity interest in the Company, and transferred
ceramic-related technology to the Company with a long-term objective of
developing ceramic components for automobile engines. The Company's efforts in
automotive applications are still in an early stage.  However, in 1999 the
Company obtained orders for and commenced shipments of "cam rollers" for a major
diesel manufacturer.

                                       1
<PAGE>

Industry Background

Developments in industrial processing, military systems, microwave electronics,
consumer electronics, automotive and diesel engine products, and orthodontics
have generated a demand for high performance materials with certain properties
not readily available in metals or plastics.  In certain high performance
applications, this demand has been met by products made of advanced technical
ceramics.

The following table compares certain favorable properties of selected advanced
technical ceramics commonly used by the Company with those of other selected
materials.

<TABLE>
<CAPTION>
                               MELTING
                                POINT           HARDNESS           CHEMICAL                                 DENSITY
                              (DEGREES          (VICKERS          RESISTANCE            ELECTRICAL           (GMS
MATERIALS                    FAHRENHEIT)         SCALE)            TO ACIDS             PROPERTIES          PER CC)
====================================================================================================================
<S>                        <C>               <C>               <C>                 <C>                    <C>
Advanced technical                                                                 From conductors to
 ceramics                  2,500 to 6,900    1,600 to 7,000        Excellent       excellent insulators   2.5 to 4.5

High strength alloy
 steel                     2,500 to 2,700      250 to 900            Fair               Conductors        7.0 to 9.0

High performance                                               Good to Excellent   Good to excellent
 plastics                    275 to 750          5 to 10                           insulators             1.0 to 2.0
====================================================================================================================
</TABLE>

Ceramics such as earthenware, glass, brick and tile have been made for centuries
and are still in common use today.  The inertness and lasting qualities of
ceramics are illustrated by the artifacts uncovered intact in modern times.
Almost all traditional ceramics, including those of ancient times, were based on
clay.  In recent years, significant advances have been made in ceramic
technology through the application of specialized processes to produce man-made
ceramic powders.  In the 1950's and 1960's, developments in aluminum oxide and
other oxides provided ceramics that were excellent electrical insulators and
were capable of withstanding high temperatures.  In the 1970's, these and other
developments resulted in the ability to manufacture advanced technical ceramics
with great strength at elevated temperatures and reduced brittleness,
historically a primary limitation of ceramics.  The industry that has emerged
from these advances is known as advanced technical (or structural) ceramics.

The properties of advanced technical ceramics present a compelling case for
their use in a wide array of applications.  However, manufacturing costs
associated with the production of these materials need to be reduced in order to
accelerate the use of advanced technical ceramics as a direct replacement for
metals, plastics or other ceramics.  A portion of these costs are related to the
need for diamond grinding finished components to exacting tolerances.  Industry
cost reduction efforts have included the production of blanks or feed stock to
"near net shape" configurations, thus reducing the need for final finishing.
Manufacturers are also seeking to reduce costs through the use of high volume
automated processing and finishing equipment and techniques, and to achieve
economies of scale in areas such as powder processing, blank fabrication,
firing, finishing and inspection.

The automobile industry is particularly sensitive to initial as well as life
cycle costs.  Although the current state of the art of advanced technical
ceramics suggests potential automotive acceptance, the cost factors currently
will not permit automobile related production.  The industry goal is to reduce
advanced technical ceramics costs as close as possible to the cost of equivalent
current metal parts.

                                       2
<PAGE>

Ceradyne Strategy

The Company's strategy is to capitalize on its existing technologies, developed
originally for defense and aerospace applications, and to broaden its product
and customer base through increased marketing efforts both domestically and
internationally.  The Company is focusing on additional customer opportunities
for existing products, and on emerging markets and products which require or can
benefit from the physical, chemical or electronic properties of advanced
technical ceramics.  To support this strategy, the Company's Advanced Ceramic
Operations in Costa Mesa, California created a new Research & Development
Department in early 1998 to focus on new materials technology.

Ceradyne seeks to increase sales of its traditional products primarily through
expanded domestic and global marketing efforts. Examples of these products and
market applications include:

        . Lightweight ceramic armor for military applications.

        . Industrial ceramics utilizing fused silica ceramics for the glass
          tempering and steel making markets.

        . Microwave cathodes, microwave absorbing Ceralloy(R) ceramics and
          samarium cobalt magnets for use in microwave power tubes in
          communications, radar and electronic countermeasure applications.

In addition to the Company's strategy to leverage its existing technologies, the
Company expects much of its future growth to come from products which are
currently in early production or still in development. There can be no
assurance, however, that products still under development will be successfully
completed, or that any of these newer products, including those already in
production, will achieve wide market acceptance.  See "Rick Factors".  The
following table illustrates these newer and planned products and the markets for
which they are intended.

                                       3
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
       MARKET OPPORTUNITY                        TECHNICAL DEMANDS OF MARKET                   CERADYNE'S STRATEGIC RESPONSE
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                                          <C>
                                                         INDUSTRIAL
------------------------------------------------------------------------------------------------------------------------------------
Corrosion resistant non-oxide ceramics       The industry has historically used           Ceradyne has created a business unit
for use as semiconductor equipment           silicon metal, quartz, and aluminum          called "Semiconductor Equipment
chamber components that handle wafers.       oxide ceramics to fabricate chamber          Components" and has begun supplying high
                                             components. Next generation equipment        density and high purity nitride and
                                             may have operating conditions that may       carbide ceramics to several equipment
                                             deteriorate currently used materials in      suppliers. The R & D group is attempting
                                             some sections.                               to develop compositions tailored to each
                                                                                          equipment manufacturer's environment.

Wear resistant components required on       Failure of industrial equipment is often      Ceralloy(R) 147 Sintered Reaction Bonded
the rubbing or cutting surfaces of          caused by premature wearing out of            Silicon Nitride (SRBSN) industrial wear
industrial machinery, such as in paper      surfaces due to abrasive action.              parts and cutting tool inserts are
making equipment, centrifuges, and          Examples include paper making where the       designed to replace hard metal or even
cutting tool inserts.                       pulp slurry runs at 5000 feet per             oxide ceramic wear surfaces, resulting
                                            minute, or in metal cutting where as          in great productivity, quality and
                                            much as .125 inch depth of cut are            longer "uptime".
                                            removed in a single pass.
------------------------------------------------------------------------------------------------------------------------------------

                                                              DEFENSE
------------------------------------------------------------------------------------------------------------------------------------
Lightweight armor for military and law      As tactical conflicts as well as              Ceralloy 546(R) (boron carbide) or
enforcement personnel.                      terrorist and other activities result in      Ceralloy(R) 146 (silicon carbide) backed
                                            the increased use of automatic weapons,       with Kevlar(TM), Spectra(TM) or other
                                            it has become necessary to stop bullets       laminates are designed to provide
                                            as great as a .50 caliber machine gun         lightweight ballistic protection greater
                                            round. However, vests or other armor must     than Kevlar alone at an acceptable
                                            be light enough in weight to allow            weight.
                                            freedom of movement without undue
                                            fatigue.

Missile nose cones (radomes).               Next generation defensive missiles            The Company's advanced technical ceramic
                                            (Standard Missile Block IV and Block IVA      radomes are designed to address demanding
                                            and Patriot PAC-3) will be required to        specifications of next generation missile
                                            fly at extremely high velocities, tight       nose cones.
                                            turning radii, and severe weather
                                            conditions. These operating conditions
                                            may preclude the use of conventional
                                            polymer materials.

Lightweight applique armor for              The increased necessity for worldwide         New armor development initiatives at
ground combat vehicles.                     military police actions and rapid             Ceradyne are focused on low cost, durable
                                            response peacekeeping missions is             modular armor kit technologies that can
                                            driving the military vehicle force to         be added to many different vehicles.
                                            lightweight systems that are air              Multi-hit protection is provided against
                                            transportable. These vehicles must            7.62mm, 12.7mm and 14.5mm armor piercing
                                            provide armor protection beyond their         ammunition.
                                            original design specification, which can
                                            only be met through the addition of
                                            lightweight modular armor applique.
------------------------------------------------------------------------------------------------------------------------------------

                                                             CONSUMER
------------------------------------------------------------------------------------------------------------------------------------
Orthodontic brackets                        Traditional stainless steel orthodontic       Ceradyne's Transtar translucent
                                            ceramic brackets are often considered         orthodontic brackets are inert, pick up
                                            unsightly. Substitute clear plastic           the color of the patient's teeth and
                                            materials can be weak and may stain.          allow the orthodontist to correct the
                                            Some orthodontic patients prefer              patient's bite. The Company and its
                                            aesthetically pleasing brackets which         marketing partner, 3M/Unitek, introduced
                                            can be affixed to each tooth to support       an enhanced version of this ceramic
                                            the archwire.                                 bracket in 1996, which is marketed by
                                                                                          Unitek under the brand name "Clarity".
                                                                                          Shipments of orthodontic brackets
                                                                                          increased by over 30% in 1999.
------------------------------------------------------------------------------------------------------------------------------------

                                                            AUTOMOTIVE
------------------------------------------------------------------------------------------------------------------------------------
Automobile internal combustion              In order to achieve diesel engine life        Ceradyne's Ceralloy(R) 146 SRBSN is a
engine and diesel engine valve              of one million miles and automobile           candidate for a variety of engine
train and other engine components.          engine life of over 125,000 miles             components including cam rollers, bucket
                                            without major maintenance, it may be          tappet inserts, engine valves, clevis
                                            necessary to replace metal engine             pins and fuel pump parts. The Company is
                                            components with longer lasting, lighter       in production of parts for Detroit
                                            weight, higher temperature resistant          Diesel Corp., and prototype development
                                            ceramic parts at acceptable unit costs.       with other heavy duty diesel engine
                                                                                          manufacturers and Ford Motor Company.
                                                                                          Volume production orders have occurred
                                                                                          in 1999, and the Company seeks to
                                                                                          increase this product line in the
                                                                                          future.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       4
<PAGE>

As part of the Company's strategy, management intends to establish additional
sales representative and distributor relationships, particularly in
international markets.  The Company will also seek to develop strategic product
development or marketing relationships with other manufacturing companies or key
customers whose expertise, marketing or financial resources will assist the
Company in accomplishing these objectives.  See "Risk Factors".

Strategic Relationships

The Company has established two strategic relationships which have been, and the
Company expects will continue to be, important factors in the Company's efforts
to develop and expand its advanced technical ceramic technology into new
products and markets.  These relationships are described below.

Ford Motor Company Joint Product Development Program.  Ceradyne completed a
series of transactions with the Ford Motor Company ("Ford") in March 1986 with a
long-term objective of developing ceramic components for automobiles.  Key to
this venture was the transfer of technology developed by Ford relating to
technical ceramics, including a portfolio of United States and corresponding
foreign patents and patent applications, and the investment of $10 million in
the Company in exchange for Common Stock which eventually resulted in an
ownership interest in Ceradyne of approximately 14.9%.  Ford and the Company
also entered into a joint development program pursuant to which Ceradyne has
been applying its experience and expertise in technical ceramics to develop this
technology into commercial products with a view to eventually develop components
for automobile engines.  Through fiscal 1999, Ford has contributed to the
Company, on a cost sharing basis, a total of $4.8 million in cash and equipment
under this joint development program. The technology acquired from Ford and the
efforts of this joint development program have led to the development of
Ceradyne's Ceralloy(R) 147 sintered reaction bonded silicon nitride (SRBSN)
advanced technical ceramic, from which the Company now produces a line of
industrial wear components and has made prototype parts for evaluation and
testing in internal combustion and diesel engines.

3M/Unitek Orthodontic Bracket Joint Program.  In March 1986, Ceradyne entered
into a joint development and supply agreement with Unitek Corporation, a
subsidiary of Minnesota Mining and Mfg ("3M/Unitek") for the development of a
translucent ceramic bracket for orthodontic appliances commonly known as braces.
Under this agreement, 3M/Unitek, which is a major manufacturer of stainless
steel orthodontic brackets, provided Ceradyne with information regarding the
functional specifications and properties which ceramic brackets would be
required to satisfy.  Based on this information and utilizing its experience
with translucent ceramics originally produced by Ceradyne for defense electronic
countermeasure applications, Ceradyne developed, and in 1987 began
manufacturing, translucent ceramic brackets.  These brackets cosmetically blend
with the natural color of the patient's teeth while performing the structural
functions formerly performed by traditional stainless steel brackets.

Ceradyne and 3M/Unitek have obtained and jointly own two United States patents
covering the basic use of translucent ceramics for an orthodontic bracket.
3M/Unitek has an exclusive right to market brackets based on this technology
until 2007.

                                       5
<PAGE>

Market Applications

The Company's products can be categorized by the principal market applications
they address: (i) industrial, (ii) defense, (iii) consumer, (iv) microwave tube
products and (v) automotive.  These markets accounted for approximately 43.6%,
13.8%, 17.1%, 21.4%, and 4.1%, respectively, of net sales for the year ended
December 31, 1997, 46.2%, 14.0%, 16.0%, 22.8%, and 1.0%, respectively, of net
sales for the year ended December 31, 1998, and 37.7%, 20.7%, 18.6%, 21.0%, and
2.0%, respectively, of net sales for the year ended December 31, 1999.

Set forth below is a description of the Company's principle products itemized by
market:

  Industrial

Industrial Wear Components. Ceradyne's industrial wear components are made
primarily of its Ceralloy(R) 147 sintered reaction bonded silicon nitride
(SRBSN).  These SRBSN ceramic components are generally incorporated in
industrial machinery where severe abrasive conditions exist which wear out vital
components.  The Ceradyne wear resistant parts are used to replace conventional
wear materials such as tungsten carbide or ceramics such as alumina or zirconia.
Often these parts are incorporated in high wear areas at the original equipment
manufacturer's plant.  Applications include metal cutting tool inserts, paper
and can making equipment, abrasive blasting nozzles as well as custom
applications.

Semiconductor Equipment Components.  This is a market that may offer Ceradyne
growth opportunities. The equipment used to make semiconductor devices (wafers)
is extremely advanced and the newest generation has operating environments that
are harsh enough to severely limit the life of the traditional ceramic and metal
components.  Ceradyne is positioned to offer a new generation of non oxide
ceramics which have exceptional corrosion resistance.

Tempered Glass Furnace Components and Metallurgical and Industrial Tooling.
Fused silica ceramic is a ceramic which does not materially expand when heated,
nor materially contract when cooled.  Therefore, it is used to produce
industrial tooling and molds where complicated shapes and dimensions must be
maintained over a wide range of temperatures.  Such applications include the
forming and shaping of titanium metal, used in the manufacturing of aircraft.
Other applications take advantage of fused silica's excellent thermal shock
resistance and inertness when in contact with glass. These applications include
components for equipment used in the fabrication of flat plate and tempered
glass or contoured shapes such as automobile windshields.  Fused silica ceramic
shapes of up to 14 feet in length are produced in the Company's facility located
near Atlanta, Georgia.

  Defense

Lightweight Ceramic Armor.  Although armor has progressed through the centuries
from animal skin shields to metal armored suits, to Kevlar(TM) vests (for light
armor), to heavy steel plates, the requirements for light weight and maximum
projectile stopping capability vary little.  Ceradyne has developed and
currently produces lightweight ceramic armor capable of protecting against
threats as great as .50 caliber armor piercing machine gun bullets.  Compared to
traditional steel armor plates, Ceradyne's ceramic armor systems offer weight
savings as great as 50% for .50 caliber and 75% for 7.62mm armor piercing
projectiles.  Utilizing hot pressed Ceralloy(R) ceramic, the Company's armor
plates are laminated with either Kevlar(TM), Spectra(TM) or fiberglass and
formed

                                       6
<PAGE>

into a wide variety of shapes, structures and components.  Historically, ceramic
armor manufactured by the Company has been used principally for military
helicopter crew seats and airframe panels.  The Company currently supplies
ceramic armor systems for the following helicopter programs: the Blackhawk
helicopter manufactured by Sikorsky Aircraft, the Apache helicopter manufactured
by Boeing, Inc., the Cobra helicopter manufactured by the Bell Helicopter
division of Textron Inc., and the Sea King helicopter manufactured by Westland
Helicopters.  The Company believes it is a leader in producing lightweight
ceramic armor for military helicopters.  See "Risk Factors".

The Company received its first production contract for ceramic armor vests for
military personnel in January 1995.  This order, from the Defense Logistics
Agency of the United States Government, was for $3.5 million in vests which the
Company shipped during 1996.

On March 2, 1998, a U.S. government agency selected Ceradyne to provide certain
ceramic armor products over a multi-year period.  Ceradyne received its first
production order under this program in October 1998 in the amount of $2.4
million, and the second order was in June, 1999 for $4.2 million. Shipments of
these orders began in the fourth quarter of 1999.  The government has indicated
that total orders over the 5-year life of this program could exceed $100
million.  However, there can be no assurances as to the exact quantities or
deliveries under this program because the government is not required to purchase
any minimum amount and all orders are at the full discretion of the government.

Missile Nose Cones (Radomes). The Company produces conical shaped, precision
machined ceramic components which are designed to be mounted by its customers on
the front end of defensive missiles.  These nose cones, or radomes, are designed
for applications where the velocities and operating environments are severe
enough that the thermal shock and erosion resistance, high strength and
microwave transparency properties of advanced technical ceramics are required.
Radomes manufactured by the Company have been qualified for the Standard Missile
Block IV and Block IVA missile program and for the Patriot PAC-3 missile
program.

  Consumer

Ceramic Orthodontic Brackets. In the orthodontic process of correcting a
patient's tooth alignment, typically small (about 1/4") stainless steel
brackets are adhered to each individual tooth in order to serve as a guide to
the archwire which is the wire that sets into each bracket. The cosmetic
appearance of all this metal is often considered quite unattractive.  Ceradyne,
together with its marketing partner, 3M/Unitek, have developed and are marketing
ceramic orthodontic brackets made of Ceradyne's translucent ceramic,
Transtar(R).  The translucency of this ceramic bracket, together with the
classic ceramic properties of hardness, chemical inertness and imperviousness,
have resulted in a cosmetic substitute for traditional stainless steel brackets.
These products are generally sold as aesthetic alternatives to conventional
metal brackets and have been in production since 1987.  Ceradyne and 3M/Unitek
introduced a new enhanced ceramic bracket called "Clarity" in October of 1996.
This product has patent protection and offers new features which improve the
bracket's strength and functionality, compared to earlier designs manufactured
by the Company.  Comments from orthodontists who have purchased Clarity brackets
have been positive. The Company believes  Clarity brackets offer the
orthodontist a more robust product that will minimize treatment and chair time
while providing superior aesthetic appearance.

                                       7
<PAGE>

  Microwave Tube Products

Microwave Ceramic-Impregnated Dispenser Cathodes.  The Company manufactures
ceramic-impregnated dispenser cathodes which are used in microwave tubes for
applications in radar, satellite communications, electronic countermeasures and
other uses.  Dispenser cathodes, when heated, provide the stream of electrons
which are magnetically focused into an electron beam.  Microwave frequency
signals which interact with this beam of electrons are substantially increased
in power. Microwave dispenser cathodes are primarily composed of a porous
tungsten matrix impregnated with ceramic oxide compounds.

Samarium Cobalt Permanent Magnets.  The Company's samarium cobalt magnets are
sold as components primarily for microwave tube applications.  Electron beams in
microwave tubes generated by the dispenser cathodes described above can be
controlled by the magnetic force provided by these powerful permanent magnets.
The magnets are generally small sub-components of microwave traveling wave
tubes.

Precision Ceramics.  Ceradyne produces a wide variety of hot pressed Ceralloy(R)
ceramic compositions, precision diamond ground to close tolerances, primarily
for microwave tube applications.  The interior cavities of microwave tubes often
require ceramic components capable of operating at elevated temperatures and in
high vacuums.

  Automotive Market

Internal Combustion and Diesel Engine Components.  The demand for higher
performance, more efficient and more durable engines for heavy duty diesel
trucks and automobiles creates additional opportunities for advanced technical
ceramics.  For instance, the Company believes that if engines could be produced
using certain advanced technical ceramic components, they could be lighter and
longer lasting than those using metal components and could operate at higher
temperatures, with reduced cooling and lubrication requirements.  As a result,
engines would use less fuel, achieve more complete combustion, thereby reducing
emissions, and be less costly to maintain.  Because of these potential benefits,
industry-wide efforts are being made to develop advanced technical ceramic
technology to replace critical steel components in diesel and automobile
engines.

Ceradyne has provided a number of prototype parts made of Ceralloy(R) 147 SRBSN
materials for evaluation and testing in internal combustion and diesel engines.
In the fourth quarter of 1998, the Company received a letter of intent for the
production of diesel engine components made from Ceradyne's Ceralloy(R) 147-31N
sintered reaction bonded silicon nitride (SRBSN).  Production began in the third
quarter 1999 and shipments are expected to be $1 million during the first 12
months after shipments commence.  Contingent upon Ceradyne's performance,
including meeting certain customer quality and delivery milestones, the Company
expects to receive orders for significantly higher volumes in the future.
Ceradyne, in the fourth quarter of 1999, began preproduction qualification of a
component for a high pressure fuel pump which is used in light duty diesel
engines.  The Company expects production to begin in mid-2000.  Also, Ceradyne
is engaged in a joint development program with Ford to develop ceramic
components for automobile engines.  Ford is not obligated to purchase any
minimum quantities of components developed under this program, and Ceradyne's
efforts in this area are still in the experimental stage with future success
greatly dependent on achieving cost reductions while maintaining high quality
levels.  See "Rick Factors".

                                       8
<PAGE>

  Other

Utilizing its advanced technical ceramics technologies and facilities, the
Company also manufactures a number of other products related to the foregoing
markets, such as dispenser cathodes for ion laser applications, samarium cobalt
permanent magnets for motors and instruments, and other precision advanced
technical ceramics.  None of these products provide a material amount of revenue
to the Company.

Marketing and Customers

Each of Ceradyne's three manufacturing locations maintains an autonomous sales
and marketing force promoting their individual products.  The Company has more
than 10 employees directly involved in marketing, including a Marketing Manager
located in the United Kingdom who was hired in February, 2000, and has
agreements with manufacturers' representatives in the United States and other
countries who are compensated as a percent of sales in their territory. Ceradyne
is focusing much of its marketing effort outside the United States through
direct involvement of senior management personnel from the Company's U.S.
facilities in concert with local manufacturing representatives.  Revenues from
export sales represented approximately 20% of total net sales in 1997, 16% in
1998 and 11% in 1999.

Generally, the Company sells components to contractors or original equipment
manufacturers.  To a lesser extent, Ceradyne sells its products directly to the
end user.  The Company sells its translucent ceramic orthodontic brackets only
to 3M/Unitek pursuant to an exclusive marketing agreement with that customer.
See "Risk Factors".  For years ended December 31, 1997, 1998 and 1999, 3M/Unitek
accounted for approximately 17%, 16%, and 18%, respectively, of net sales.  One
other customer, CPI, Inc., accounted for approximately 11% of net sales for year
ended December 31, 1998.

The Company continues to explore various domestic and international marketing,
and other relationships to increase its sales and market penetration.
Furthermore, Ceradyne is attempting to create long-term relationships with its
customers to promote a smoother, more predictable flow of orders and shipments
by entering into multi-year agreements or exclusive relationships where
possible.

Manufacturing Processes

Ceradyne has a number of manufacturing processes which are dedicated to specific
products and markets.  These processes and the product applications are
described below.

Hot Pressing.  The Company's hot pressing process is generally used to fabricate
ceramic shapes for  lightweight ceramic armor and semiconductor equipment
components.  Ceradyne has developed and constructed induction heated furnaces
capable of operating at temperatures exceeding 4000 (degrees) Fahrenheit in
inert atmospheres at pressures up to 5000 lbs. per square inch. This equipment
enables Ceradyne to fabricate parts more than 26 inches in diameter, which is
considered large for advanced technical ceramics. Through the use of multiple
cavity dies and special tooling, the Company can produce a number of parts in
one furnace during a single heating and pressing cycle.

Ceradyne procures its raw materials (fine powders) from several outside
suppliers.  After processing by the Company, the powders are either loaded
directly into the hot pressing molds or

                                       9
<PAGE>

are shaped into preforms prior to loading into the hot pressing molds. The
powders are placed in specially prepared graphite tooling, most of which is
produced by Ceradyne. Heat and pressure are gradually applied to the desired
level, carefully maintained and finally reduced. The furnace is removed from the
press while cooling to permit the press to be used with another furnace. For
most products, approximately 20 hours are required to perform this cycle. The
resultant ceramic product generally has mechanical, chemical and electrical
properties of a quality approaching that only theoretically obtainable. Almost
all products are then finished by diamond grinding to meet precise dimensional
specifications.

Sintering of Fused Silica Ceramics.  Sintering of fused silica ceramics is the
process Ceradyne uses to fabricate fused silica ceramic shapes for applications
in glass tempering furnaces, metallurgical tooling and other industrial uses.
To fabricate fused silica ceramic shapes, fused silica powders are made into
unfired shapes through slip casting or other ceramic compaction processes.
These unfired "green" shapes are fired as they move through a continuously
operated 150 foot long tunnel kiln at temperatures up to 2500 (degrees)
Fahrenheit. The final shapes are often marketed in the "as fired" condition or,
in some cases, precision diamond ground to achieve specific dimensional
tolerances or surface finishes required by certain customers. See "Business,
Manufacturing Processes-Diamond Grinding".

Ceramic-Impregnated Dispenser Cathode Fabrication.  Ceramic-impregnated
dispenser cathode fabrication is used to produce cathodes for microwave power
tube applications.  To produce ceramic-impregnated dispenser cathodes, both
tungsten metal powders and ceramic powders are used.  The tungsten metal powders
are isostatically pressed in polymer tooling, removed and fired in special
atmospheres at temperatures in excess of 400 (degrees) Fahrenheit.  The tungsten
billets are machined into precision shapes with exacting tolerances. The
tungsten machined shapes are impregnated with a ceramic composite and fired at
high temperatures in special atmospheres. The ceramic impregnated components are
assembled and furnace brazed.

Final processing includes the insertion of a metal heating element within a
ceramic insulating compound and the addition of an extremely thin layer of
precious metals to the surface.  The Company's final quality inspection often
includes a test of the cathode's electron emitting capabilities at normal
operating temperatures.

Sintering and Reaction Bonding of Silicon Nitride.  The sintering of reaction
bonding silicon nitride results in the Company's Ceralloy(R) 147 SRBSN, which is
used in industrial and automotive applications.  Ceradyne's SRBSN is based on
technology acquired from Ford. See "Strategic Relationships".  This SRBSN
process begins with relatively inexpensive high purity elemental silicon (Si)
powders, which contrasts sharply with most other competitors' manufacturing
techniques which start with relatively more expensive silicon nitride (Si3N4)
powders.

After additives are incorporated by milling and spray drying, the silicon
powders are formed into shapes through conventional ceramic processing such as
dry pressing.  These shapes are then fired in a nitrogen atmosphere which
converts the silicon part to a silicon nitride part.  At this step (reaction
bonding), the silicon nitride is pressure sintered in an inert atmosphere
increasing the strength of the component three fold.  As a result of SRBSN
processing, the ceramic crystals grow in an intertwining "needle-like" fashion
which the Company has named NeedleLok(TM).  Ceradyne's NeedleLok(TM) structure
results in a tough, high fracture energy part.  The process is economical due to
the low cost of the starting powders and can be used to produce extremely high
production volumes of parts due to the use of conventional pressing processes.

                                       10
<PAGE>

Fabrication of Translucent Ceramics (Transtar(R)).  Ceradyne produces
translucent aluminum oxide (Transtar(R)) components primarily for use as
orthodontic ceramic brackets.  The high purity powders are purchased from
outside vendors and processed by dedicated conventional ceramic mechanical dry
presses.  The formed blanks are then fired in a segregated furnace in a hydrogen
atmosphere at 1800 (degrees) Celsius until the ceramics enter into a strong
translucent condition. These fired aesthetic appearing brackets then have
certain critical features diamond ground into them. The final step is a
proprietary treatment of the bonding side in order to permit a sound mechanical
seal when bound to the patient's teeth.

Diamond Grinding. Many of Ceradyne's advanced technical ceramic products must be
finished by diamond grinding because of their extreme hardness. The Company's
finished components typically are machined to tolerances of (plus or minus) .001
inch and occasionally are machined to tolerances up to (plus or minus) .0001
inch. To a limited extent, the Company also performs diamond grinding services
for customers independently of its other manufacturing processes to
specifications provided by the customer. The Company's diamond grinding
department can perform surface grinding, diameter grinding, ultrasonic diamond
grinding, diamond lapping, diamond slicing and honing. The equipment includes
manual, automatic and computer numerically controlled (CNC) grinders. The CNC
grinders have been specially adapted by the Company for precision grinding of
ceramic contours to exacting tolerances.

Fabrication of Samarium Cobalt Permanent Magnets.  The fabrication of samarium
cobalt permanent magnets results in various magnet shapes which are primarily
used in microwave tube applications.  The Company procures premixed samarium
cobalt powder either as SmCo5 or Sm2Co17 compositions. The powders are then
milled and formed into the final configuration by pressing in a magnetic field
using a specially designed magnet press.  These "pre-fire" or "green" magnets
are then sintered at 2000 (degrees) Fahrenheit in helium or vacuum. The magnets
may then be subsequently diamond ground and characterized as to each individual
magnet's strength.

Raw Materials.  The starting raw materials for Ceradyne's manufacturing
operations are generally fine, man-made powders available from several domestic
and foreign sources. The raw materials, such as Kevlar(TM), graphite, metal
components and ceramic powders are readily available from several commercial
sources.

Quality Control.  Ceradyne products are made to a number of exacting
specifications.  In order to meet both internal quality criteria and customer
requirements, the Company has implemented a number of quality assurance and in-
process statistical process control programs.  These quality programs are
implemented separately at each of Ceradyne's three manufacturing locations.
Thermo Materials Division in Scottdale, Georgia received its ISO 9002
Certification in 1997.  Advanced Ceramic Operations in Costa Mesa, California
received its ISO 9001 Certification in 1998.

Engineering and Research

Ceradyne's engineering and research efforts consist primarily of application
engineering in response to customer requirements and to a Research and
Development Department to focus on new materials technology.  These efforts are
directed toward the creation of new products, the modification of existing
products to fit specific customer needs, or the development of enhanced ceramic
process technology.  The Company is also engaged in internally-funded research
to improve and reduce the cost of production and to develop new products.  Costs
associated with

                                       11
<PAGE>

application engineering and internally-funded research are generally expensed as
incurred and are included in cost of product sales, or in Research and
Development expense. Costs associated with Company-funded research were
approximately $380,000 in 1997, $728,000 in 1998 and $878,000 in 1999. The
totals consist of $344,000 and $597,000 from the Research and Development
Department, and $384,000 and $281,000 from the Application Engineering
Department for the years ended December 31, 1998 and 1999, respectively.

Competition

Ceradyne competes on the basis of product performance, material specifications,
application engineering capabilities, customer support, reputation and price.
Competitive pressures vary in each specific product market, depending on the
product and program.  In many instances, the competitors are well-known
companies with greater financial, marketing and technical resources than
Ceradyne. Ceradyne intends to continue to focus on selected business areas in
which it can exploit its technological, manufacturing and marketing strengths.
Some of Ceradyne's competitors are divisions of larger companies, with each of
Ceradyne's product lines subject to completely different competitors.  Some of
the competitors of the Company include Kyocera Corporation's Industrial Ceramics
Group, Vesuvius, McDanel Refractories, Cercom, Coors Ceramics Company, Spectra-
Mat, and others.  In many applications, the Company also competes with
manufacturers of non-ceramic materials.  For future automotive applications,
there is a wide range of both current and potential domestic and international
competitors.  See "Risk Factors".

Backlog

Ceradyne records an item as backlog when it receives a contract or purchase
order indicating the number of units to be purchased, the purchase price,
specifications and other customary terms and conditions.  Ceradyne customarily
includes unexercised options as a separate item in its backlog because the
purchase orders are given on the basis of the total order, including options.
Total backlog as of December 31, 1999 was approximately $23.7 million,
consisting of $21.1 million of firm scheduled orders and $2.6 million of
unexercised options.  As of December 31, 1998 total backlog approximated $17.0
million consisting of $13.9 million of firm scheduled orders and $3.1 million of
unexercised options.  Typically, firm orders are scheduled to be shipped within
12 to 18 months from receipt of order.

Patents, Licenses and Trademarks

The Company relies primarily on trade secrecy to protect compositions and
processes that it believes are proprietary.  In certain cases, the disclosure of
information concerning such compositions or processes in issuing a patent could
be competitively disadvantageous.  However, management believes that patents are
important for technologies where trade secrecy alone is not a reliable source of
protection.  Accordingly, Ceradyne has applied for, or has been granted, several
United States patents relating to compositions, products or processes that
management believes are proprietary, including lightweight ceramic armor.

Two U.S. patents have been issued to the Company relating to translucent
ceramics for orthodontic brackets.  The earliest of these patents expires in
2007.  These patents are co-invented and co-owned by Ceradyne and 3M/Unitek.
Ceradyne and 3M/Unitek have granted licenses to eight companies whose ceramic
orthodontic brackets infringe the Ceradyne-3M/Unitek patents, wherein

                                       12
<PAGE>

those companies pay royalties to Ceradyne and 3M/Unitek based on sales of their
orthodontic ceramic brackets for the remaining life of the patents. See "Risk
Factors".

Through its association with Ford, Ceradyne acquired in excess of 80 U.S.
patents, of which 13 are still active, and corresponding foreign patents and
applications relating to technical ceramics for automotive technology.  The last
of these patents will expire in August 2007.  See "Strategic Relationships".

In addition to the above, Ceradyne has been issued 17 U.S. patents and has 4
patents pending, and has applied for corresponding foreign patents in various
foreign countries.  The earliest of these patents expires in 2002.


"Ceralloy(R)", the name of Ceradyne's technical ceramics, "Ceradyne(R)" and the
Ceradyne logo, comprising the stylized letters "CD(R)", are major trademarks of
the Company which have been registered in the United States and various foreign
countries.  The Company also has other trademarks, including "Transtar(R)",
"Semicon(R)", "Thermo(R)", "Isomolded(R)", and "NeedleLok(TM) ".

Employees

At December 31, 1999, Ceradyne employed approximately 350 persons, including 14
employees with undergraduate or graduate degrees in ceramic engineering or
material sciences.  Management considers its employee relations to be excellent.
The Company has not experienced difficulty in attracting personnel.  None of the
Company's employees are represented by a labor union.

Risk Factors

This annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Our actual results may differ materially from
the results projected in the forward-looking statements.  Factors that might
cause such a difference include, but are not limited to, the following:

  We Must Successfully Develop and Market New Products; We have Limited Volume
Manufacturing Experience for Products Under Development

Our future prospects will depend to a large extent on the success of products
which currently provide little revenue or which remain under development. These
products include:

   .  semiconductor equipment components;
   .  ceramic components for automobile and diesel engines.

We are developing ceramic automotive and diesel engine components based on our
belief that a significant market for these products will emerge.  However,
predicting future demand for such components is fraught with uncertainties.
This is a new and evolving market and advanced technical ceramics are not
currently used in any significant automotive applications.  It is possible that
such applications will never emerge.

Even if a market emerges, our efforts to produce ceramic components for
automobile and diesel engines remain in an early stage.  To successfully produce
these components, we must significantly lower manufacturing costs and develop
high volume manufacturing capabilities while maintaining

                                       13
<PAGE>

component quality. If we meet our production goals, it typically takes several
years to introduce new materials and components into production automobiles.
Thus, demand for these products and our ability to service such demand are
subject to a high degree of uncertainty.

Nevertheless, we believe that such a market will emerge eventually and that we
will be well-positioned to capitalize on it.  We have received a Purchase Order
for the production of diesel engine components made from Ceradyne's Ceralloy(R)
147-31N sintered reaction bonded silicon nitride (SRBSN).  Production began late
in the third quarter of 1999.  Ceradyne expects to ship approximately $1 million
annually starting in the third quarter of 1999. Ceradyne also received Purchase
Orders for preproduction qualification of a component for a high pressure fuel
pump.  Production is expected to begin by mid-2000.

  Failure to Manage Our Growth Could Adversely Affect Us

Our current introduction of new products is placing, and will continue to place,
a significant strain on our resources and personnel.  To continue our growth, we
must introduce new products that apply our core advanced technical ceramic
technologies.  Managing this transition to new products will strain our
operational, financial and managerial resources into the foreseeable future.

To effectively manage growth, we must:

   .  add manufacturing capacity and personnel;
   .  continue to implement and improve our operational, financial and
      management information systems;
   .  develop the management skills of our managers and supervisors;
   .  add new management personnel and improve the expertise of existing
      management personnel; and
   .  train, motivate and manage our employees.

Any failure to effectively manage growth could have material adverse effects on
our business, operating results and financial condition.

  We Depend on Joel P. Moskowitz and Our Other Key Personnel

Our success largely depends on the continued service of our principal managers.
Many of these managers, and in particular Joel P. Moskowitz, who is Chairman,
Chief Executive Officer and President, and a principal stockholder of Ceradyne,
would be extremely difficult to replace.  We also depend on other key personnel,
and our ability to attract, motivate and retain highly qualified personnel.

Competition for skilled employees is intense and there can be no assurance that
we will be able to recruit and retain such personnel.  In addition, although Mr.
Moskowitz has an employment agreement with the Company that expires in July
2001, no other employee has an agreement for a specified term of employment with
Ceradyne.  If we are unable to retain our existing managers and employees or
hire and integrate new employees, it could have material adverse effects on our
business, operating results and financial condition.

                                       14
<PAGE>

  The Advanced Technical Ceramics Markets Are Highly Competitive

The markets for applications of advanced technical ceramics are competitive.  We
believe the principle competitive factors in these matters are:

        .  product performance;
        .  material specifications;
        .  application engineering capabilities
        .  customer support
        .  reputation; and
        .  price

At present, while we believe that we compete favorably with respect to these
factors, this may change.  If we fail to address our competitive challenges,
there could be material adverse effects on our business, financial condition and
results of operations.

Our competitors include divisions of larger companies and manufacturers of non-
ceramic materials.  Many of these competitors, both domestic and international,
have greater financial, marketing and technical resources than we do.  Our
primary competitors include Kyocera Corporation's Industrial Ceramics Group,
Vesuvius, McDanel Refractories, Cercom, Coors Ceramics Company, Spectra-Mat, and
others.  Not only do we compete with many large companies, but each of our
product lines competes with completely different companies.

We cannot guaranty that we will be able to compete successfully against our
current or future competitors or that competition will not have material adverse
effects on our business, operating results and financial condition

  We Could Be Liable for Violations of Environmental Laws and Regulations

We are subject to a variety of environmental regulations relating to the use,
storage, discharge and disposal of hazardous materials used to manufacture our
products.  Authorities could impose fines, suspend production, alter our
manufacturing processes, or stop our operations if we do not comply with these
regulations.

In the past, we produced certain products using beryllium oxide, which is highly
toxic in powder form.  This powder, if inhaled, can cause chronic beryllium
disease in a small percentage of the population.  In recent years, we have been
sued by former employees and a family member of a former employee alleging that
they had contracted chronic beryllium disease as a result of exposure to
beryllium oxide powders used in our products.  We settled several of these
claims without incurring material liability, but several lawsuits are still
pending.  We cannot guaranty that we will avoid future liability to persons who
allege that they contracted chronic beryllium disease as a result of exposure to
beryllium oxide utilized by Ceradyne.

While we believe we are in material compliance with all applicable environmental
statutes and regulations, any failure to comply with current or subsequently
enacted statutes and regulations could subject us to liabilities, fines or the
suspension of production.  Furthermore, claims asserted against us related to
exposure to beryllium oxide powder may not be covered by insurance.  Even if
covered, the amount of insurance may be inadequate to cover any adverse
judgment.

                                       15
<PAGE>

Fines and other punishments imposed in connection with environmental violations
and expenses related to remediation or compliance with environmental regulations
and future liability for incidences of chronic beryllium disease contracted by
employees or employees of customers could have material adverse effects on our
business, operating results and financial condition.

  We Depend Upon Sales to Agencies of the United States Government; We Face the
Risk That a Key Government Contract May be Terminated

We have a $23.7 million backlog of orders as of December 31, 1999.  Of this
amount, approximately $9.8 million, or 41%, represents orders for defense
applications.  These orders are closely tied to the level of U.S. defense
spending.  Certain contracts for armor or radomes are directly or indirectly
with agencies of the United States government.  Moreover, we anticipate that a
significant percentage of our revenues for the foreseeable future will derive
from direct or indirect sales to government agencies.

In recent years, the budgets of many government agencies have been reduced,
causing some of our customers and potential customers to re-evaluate their
needs.  However, this trend was partially arrested in the first quarter of 1998.
A U.S. government agency selected Ceradyne to provide certain ceramic armor
products over a 5-year period.  We received our first production order under
this program in October 1998 in the amount of $2.4 million, and the second order
was in June, 1999 for $4.2 million.  The government has indicated that it may
order as much as $100 million or more in products from us over the 5-year life
of this program, but there is no minimum amount that the government is required
to purchase and all orders are at the full discretion of the government.

Under U.S. law, defense-related contracts may be canceled by the government for
convenience at any time and without cause.  If that happens, we receive
reimbursement only for the expenses we actually incurred.  Any such
cancellations could have material adverse effects on our business, operating
results and financial condition.

  Sales of our Ceramic Orthodontic Brackets Depend on Our Exclusive Marketing
and Sales Relationship with Unitek, a Division of 3M Corporation

We developed our translucent ceramic orthodontic bracket pursuant to a joint
development agreement with Unitek.  We sell this product only to Unitek pursuant
to an exclusive marketing agreement which expires in 2007.  Consequently, our
sales of this product depend entirely on Unitek's marketing and sales efforts.

We also depend on customer and technical feedback from Unitek for the design of
improvements to the bracket.  Some orthodontists were reluctant to use early
versions of this product.  They preferred  using traditional stainless steel
brackets and were wary of certain technical problems associated with earlier
versions of our ceramic bracket.  These problems included:

        .  difficulty in removing, or debonding, the bracket from the tooth;
        .  breakage of brackets during the treatment process more often than
           experience with stainless steel brackets; and
        .  slower movement of the metal archwire through the ceramic brackets,
           resulting in longer treatment times than with stainless steel
           brackets.

                                       16
<PAGE>

Designs introduced in October 1996 under the Unitek brand name "Clarity" are
intended to improve certain features of earlier versions of the bracket, but we
cannot guaranty that these new products will completely eliminate the
aforementioned problems or will receive wide market acceptance.  Furthermore, we
cannot guaranty that Unitek will devote substantial marketing efforts to sales
of our orthodontic products, or that Unitek will not reassess its commitment to
our technologies or develop its own competitive technologies.  If Unitek fails
to actively market our orthodontic brackets, or such brackets fail to  achieve
market acceptance, there may be material adverse effects on our business,
operating results and financial condition.

  We Depend on Our International Sales; We are Subject to Risks Associated with
Operating in International Markets

Shipments to customers outside of the United States accounted for approximately
20% of our sales in 1997, 16% in 1998, and 11% in 1999.  We anticipate that
international shipments will account for a significant portion of our sales for
the foreseeable future.  Therefore, the following risks associated with
international business activities could have material adverse effects on our
performance:

        .  burdens to comply with multiple and potentially conflicting foreign
           laws and regulations, including export requirements, tariffs and
           other barriers, health and safety requirements, and unexpected
           changes in any of the foregoing.
        .  difficulty in obtaining export licenses from the U.S. government;
        .  differences in intellectual property protections;
        .  longer accounts receivable payment cycles;
        .  potentially adverse tax consequences due to overlapping or differing
           tax structures;
        .  fluctuations in currency exchange rates; and
        .  risks associated with sales to foreign government agencies similar to
           the risks associated with dealing with U.S. government agencies.

We have traditionally invoiced all of our foreign sales in U.S. dollars.
Accordingly, we do not currently engage in foreign currency hedging transactions
that could protect against the risk of currency fluctuations.  This approach
could pose risks.  If the U.S. dollar were to become more expensive relative to
the currencies of our foreign customers, the price of our products in those
countries rises and our sales into those countries, or our profitability within
those countries, may fall.

Future international activity may require that we denominate foreign sales in
the local currencies of our customers.  In that case, if the U.S. dollar were to
become more expensive relative to the currencies of our foreign customers, we
would receive fewer U.S. dollars for each unit of foreign currency that we
receive when our customers pay us. Therefore, a more expensive U.S. dollar would
cause us to incur losses upon the conversion of accounts receivable denominated
in foreign currencies.  Such losses could harm our results of operations

We cannot export some of our products to certain foreign countries without an
export license obtained from the U.S. government. We have experienced difficulty
in obtaining licenses to export our products to certain  countries.  Similar
difficulties may arise again in the future.  If any of the above risks emerge,
there may be material adverse effects on our business, operating results and
financial condition.

                                       17
<PAGE>

  We May be Adversely Affected If We Are Unable to Adequately Safeguard Our
Intellectual Property or If We Infringe on Other's Intellectual Property

We rely on a combination of patents, trade secrets, trademarks, and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve our proprietary rights to our products and production
processes.  These measures afford only limited protection and may not preclude
competitors from developing products or processes similar or superior to ours.
Moreover, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as the laws of the United States.

Although we implement protective measures and intend to defend our proprietary
rights, there can be no assurance that these efforts will succeed.  We may have
to litigate within the United States or abroad to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights and the
proprietary rights of others.  Enforcing or defending our proprietary rights
could be expensive and might not bring us timely and effective relief.

Furthermore, there can be no assurance that our products or processes are not in
violation of the patent rights of third parties, or that any of our patents will
not be challenged, invalidated or circumvented.  Although there are no pending
or threatened intellectual property lawsuits against us, we may face litigation
or infringement claims in the future.  Infringement claims could result in
substantial costs and diversion of our resources even if we ultimately prevail.
A third party claiming infringement may also obtain an injunction or other
equitable relief, which could effectively block the distribution or sale of
allegedly infringing products.  Although we may seek licenses from third parties
covering intellectual property that we are allegedly infringing, we cannot
guarantee that any such licenses could be obtained on acceptable terms, if at
all.

If we fail to adequately protect our intellectual property, or if we face claims
for infringement on the intellectual property of third parties, there may be
material adverse effects on our business, operating results, and financial
condition.

Item 2.  Properties
         ----------

The Company serves its markets from three manufacturing facilities across the
United States.  The Company's Advanced Ceramic Operations, located in Costa
Mesa, California, primarily produces armor and orthodontic products, components
for semiconductor equipment, and houses the Company's SRBSN research and
development activities.  The Company's cathode development and production are
handled through its Semicon Associates division located in Lexington, Kentucky.
Fused silica products, including missile radomes, are produced at the Company's
Thermo Materials division located in Scottdale, Georgia.  These three facilities
comprise approximately 74,000, 35,000 and 85,000 square feet, respectively.  The
Company's Costa Mesa and Scottdale facilities are held under long-term leases
which expire in October 2000, with a 5 year renewal option to October 2005, and
December 2005, respectively.  The Company owns its Lexington, Kentucky
facilities.

                                       18
<PAGE>

Ceradyne's manufacturing structure is summarized in the following table:

<TABLE>
<CAPTION>
===================================================================================================================================

          FACILITY LOCATION                                                 PRODUCTS
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>
Advanced Ceramic Operations                                 . Semiconductor Equipment Components
Costa Mesa, California                                      . Lightweight ceramic armor
Approximately 74,000 square feet                            . Orthodontic ceramic brackets
                                                            . Ceralloy(R) 147 SRBSN wear parts
                                                            . Precision ceramics
                                                            . Ceralloy(R) 147 SRBSN diesel/automotive engine parts (R&D)
-----------------------------------------------------------------------------------------------------------------------------------
Semicon Associates                                          . Microwave ceramic-impregnated dispenser cathodes
Lexington, Kentucky                                         . Ion laser ceramic-impregnated dispenser cathodes
Approximately 35,000 square feet                            . Samarium cobalt magnets
-----------------------------------------------------------------------------------------------------------------------------------
Thermo Materials                                            . Glass tempering rolls (fused silica ceramics)
Scottdale, Georgia                                          . Metallurgical tooling (fused silica ceramics)
Approximately 85,000 square feet                            . Missile radomes (fused silica ceramics)
                                                            . Castable and other fused silica product
====================================================================================================================================

</TABLE>

Item 3. Legal Proceedings
        -----------------

The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its business,
including, but not limited to, employment-related actions and workers'
compensation claims.

In October 1995, February 1997, August 1997, February 1999, and December 1999,
the Company, along with others, was served with six different complaints that
were filed by nine former employees of one of the Company's customers, and eight
spouses. The complaints, filed in the United States District Court, Eastern
District of Tennessee, allege that the customers' employees contracted chronic
beryllium disease as a result of their exposure to beryllium-containing products
sold by Ceradyne and others.  One complaint seeks compensatory damages in the
amount of $3.0 million for the four husbands, $1.0 million for the four spouses,
and punitive damages in the amount of $5.0 million.  Four other complaints each
seek compensatory damages in the amount of $5.0 million for four husbands, $1.0
million for the spouses, and punitive damages in the amount of $10.0 million.
The final complaint seeks compensatory damages in the amount of $5.0 million for
an individual and punitive damages in the amount of $10.0 million.  The Company
believes that the plaintiffs' claims are without merit and that the resolution
of these matters will not have a material adverse effect on the financial
condition or operations of the Company.  Defense of these cases has been
tendered to the Company's insurance carriers, some of which are providing a
defense subject to a reservation of rights.  There can be no assurances,
however, that these claims will be covered by insurance, or that, if covered,
the amount of insurance will be sufficient to cover any potential judgments.

We were notified by the United States Environmental Protection Agency in
December, 1998 that Ceradyne is a responsible party in the federal Superfund
cleanup of the Casmalia Disposal Site located in Santa Barbara County,
California.  The notification states that Ceradyne, along with approximately
10,000 other companies, has been designated as a de minimus waste generator due
to the relatively small quantity of the waste disposed at the Casmalia Disposal
Site.  We properly disposed of this waste material in the 1970s and 1980s.
However, waste materials disposed at the Casmalia Disposal Site have leaked into
the water table.  Under federal law, all parties who have disposed of waste
materials at the Casmalia Site must pay their proportional share of the cost of
the cleanup effort.  In the fourth quarter of 1998, we recorded an expense in
the amount of $0.2 million

                                       19
<PAGE>

as the estimated amount of our share of the cleanup costs. After negotiations
with the EPA, the final settlement was $0.1 million and was paid in December,
1999.

Item 4.   Submission of matters to a vote of security holders
          ---------------------------------------------------

  Not applicable

                                       20
<PAGE>

                                   MANAGEMENT

Executive Officers of the Registrant.

  The executive officers of the Company as of March l, 2000 are as follows:

<TABLE>
<CAPTION>
         Name        Age                     Position
------------------- -----  ---------------------------------------------
<S>                 <C>    <C>
Joel P. Moskowitz..  60    Chairman of the Board, President and Chief
                           Executive Officer

Earl E. Conabee....  62    Vice President, and Director of Marketing at
                           Thermo Materials

Garry DeBoer.......  63    Vice President, and Consultant of Semicon
                           Associates

Howard F. George...  55    Vice President Finance, Chief Financial
                           Officer and Secretary

Donald A. Kenagy...  58    Vice President, and President of Thermo
                           Materials

David P. Reed......  45    Vice President, and General Manager of
                           Advanced Ceramic Operations
</TABLE>
-------------
  Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as
President of the Company from 1974 until January 1987, and from September 1987
to the present. Mr. Moskowitz currently serves as Chairman of the Board,
President and Chief Executive Officer of the Company, which positions he has
held since 1983.  Mr. Moskowitz currently serves on the Board of Trustees of
Alfred University.  Mr. Moskowitz obtained a B.S. in Ceramic Engineering from
Alfred University in 1961 and an M.B.A. from the University of Southern
California in 1966.

  Earl E. Conabee joined the Company in July 1985, and has served as Vice
President of the Company since June 1986.  Mr. Conabee serves as Vice President
of Marketing for the Company's Thermo Materials division, where he is
responsible for the overall marketing and sales effort for fused silica
ceramics.  Prior to joining the Company, Mr. Conabee served as General Manager
of Ceramatec, a manufacturer of technical ceramics, from 1983 to 1985, and as
Director of Refinery Operations for Englehard Minerals Corporation from 1973 to
1983.  Mr. Conabee obtained a B.S. in Ceramic Engineering from Alfred University
in 1960.

  Garry DeBoer joined the Company  as President of its Semicon Associates
Division in September 1997, and has served as Vice President of the Company
since February 1999.  Since September 1999, Mr. DeBoer is serving Semicon
Associates as a Marketing Consultant.  Mr. DeBoer attended Newark College of
Engineering, majoring in Metallurgy.  He has spent most of his career in the
field of microwave electronics, used primarily in military defense systems and
commercial satellite communications.  For the past twenty-five years prior to
joining the Company, Mr. DeBoer was employed by Varian Associates and
Communications and Power Industries in various Senior Technical and Management
positions, and also served as Manager of Commercial Products for CPI's Traveling
Wave Tube Product Division.

                                       21
<PAGE>

  Howard F. George joined the Company in December 1995 and serves in the
positions of Vice President Finance, Chief Financial Officer, and Corporate
Secretary.  Prior to joining Ceradyne, Mr. George was Chief Financial Officer of
Richmond Technology, Inc. and Chief Operating Officer of its subsidiary, Static
Control Services from 1992 to 1995.  From 1990 to 1992, Mr. George was Vice
President of Finance for Sunset Richards, a subsidiary of Hanson, PLC.  Mr.
George earned his B.A. degree in Business and Economics in 1970 at California
State University Long Beach, and an MBA from Pepperdine University, Malibu in
1980.

  Donald A. Kenagy joined the Company in December 1986 when the Company acquired
Thermo Materials, and has served as Vice President of the Company since July
1991.  Mr. Kenagy is currently President of the Company's Thermo Materials
division, and as such is responsible for the operations, finances and marketing
of Thermo Materials.  Mr. Kenagy joined Thermo Materials in 1972.  Mr. Kenagy
received a B.S. in Ceramic Technology from Penn State in 1963, an M.S. in
Metallurgy from the Massachusetts Institute of Technology in 1965, and a Met.
Eng. degree from MIT in 1968.

  David P. Reed joined the Company in November 1983, and has served as Vice
President since January 1988.  Mr. Reed is responsible for the operations,
finances and marketing of the Company's Costa Mesa, California operations.
Prior to joining the Company, Mr. Reed served as Manager, Process Engineering
for the Industrial Ceramic Division of Norton Co. from 1980 to 1983. Mr. Reed
obtained a B.S. in Ceramic Engineering from Alfred University in 1976 and an
M.S. in Ceramic Engineering from the University of Illinois in 1978.

Officers serve at the discretion of the Board of Directors except for Mr.
Moskowitz, who serves pursuant to a two year employment agreement which expires
in July 2001.

                                       22
<PAGE>

                                     PART II

Item 5.   Market for the Registrant's Common Equity and Related
          -----------------------------------------------------
          Stockholder Matters
          -------------------

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol CRDN. The following table sets forth for the calendar quarters indicated
the high and low closing sale prices per share on the National Market as
reported by Nasdaq.  As of December 31, 1999, the Company had approximately 487
record holders of its Common Stock.

<TABLE>
<CAPTION>
                                   High      Low
                                  ------   -------
<S>                               <C>      <C>
Year ended December 31, 1998
     First Quarter.............    8 1/8     3 5/8
     Second Quarter............    7 1/2     4 1/2
     Third Quarter.............    5 9/16    3
     Fourth Quarter............    5 1/8     3 1/8

Year ended December 31, 1999
     First Quarter.............    4         3 1/8
     Second Quarter............    4 3/4     3
     Third Quarter.............    5         3 17/32
     Fourth Quarter............    5 1/2     3 1/2
</TABLE>

The present policy of Ceradyne is to retain earnings for the operation and
expansion of its business.  Ceradyne has never paid cash dividends, and
management does not anticipate that it will do so in the foreseeable future.

The Company did not sell any equity securities during the year ended December
31, 1999 that were not registered under the Securities Act of 1933.

                                       23
<PAGE>

Item 6.   Selected Financial Data
          -----------------------

Statements of Operations Data: (Amounts in thousands, except per share data)
-----------------------------

                                         Year Ended December 31,
                                         -----------------------
<TABLE>
<CAPTION>

                                           1999           1998           1997           1996           1995
                                       ------------   ------------   ------------   ------------   ------------

<S>                                    <C>            <C>            <C>            <C>            <C>
Net sales                                  $30,382        $26,279        $28,693        $28,212        $23,404
Cost of product sales                       23,674         21,292         23,274         21,065         16,948
                                           -------        -------        -------        -------        -------
Gross profit                                 6,708          4,987          5,419          7,147          6,456
                                           -------        -------        -------        -------        -------
Operating expenses:
Selling                                      1,480          1,494          1,515          1,571          1,492
General & administrative                     3,400          3,239          3,660          3,137          2,748
Research and development                       597            344            ---            ---            ---
                                           -------        -------        -------        -------        -------
                                             5,477          5,077          5,175          4,708          4,240
                                           -------        -------        -------        -------        -------
Income (loss) from operations                1,231           ( 90)           244          2,439          2,216
Other income (expense):
Other income                                   344            382            265          1,890            265
Interest expense                               (16)           ---           (134)          (162)          (342)
                                           -------        -------        -------        -------        -------
Income before provision (benefit)
 for income taxes                            1,559            292            375          4,167          2,139
Provision (benefit) for income taxes           (44)            10         (1,675)           127             50
                                           -------        -------        -------        -------        -------
      Net income                           $ 1,603        $   282        $ 2,050        $ 4,040        $ 2,089
                                           =======        =======        =======        =======        =======
Basic income per share                     $   .20        $   .04        $   .26        $   .52        $   .32
                                           =======        =======        =======        =======        =======
Diluted income per share                   $   .20        $   .04        $   .26        $   .51        $   .32
                                           =======        =======        =======        =======        =======
Weighted average shares
   outstanding                               8,189          8,068          8,035          7,985          6,607

<CAPTION>
Balance Sheet Data:                                            December 31,
-------------------                                            ------------
                                          1999          1998          1997          1996          1995
                                       -----------   -----------   -----------   -----------   -----------
<S>                                    <C>           <C>           <C>           <C>           <C>
Working capital                            $15,156       $15,051       $15,327       $15,892       $13,216
Total assets                                32,893        29,493        29,017        28,398        24,880
Long-term obligations                          358           ---           ---           ---           555
Stockholder's equity                       $29,137       $27,352       $26,760       $24,440       $19,852
</TABLE>

                                       24
<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         -----------------------------------------------------------------------
         of Operations
         -------------

Overview

The Company's technology was developed primarily for defense and aerospace
applications, which have historically represented and continue to represent a
substantial portion of its business. Utilizing this historical base, the Company
has transitioned over several years to a more balanced product offering,
including industrial, consumer, microwave tube products, automotive,
semiconductor, and defense applications.

The Company's cost of product sales includes the cost of materials, direct labor
expenses and manufacturing overhead expenses.  The Company's business requires
that it maintain a relatively high fixed manufacturing overhead.  As a result,
the Company's gross profit, in absolute dollars and as a percentage of net
sales, is greatly impacted by the Company's sales volume and the corresponding
absorption of fixed manufacturing overhead expenses.  Furthermore, due to the
customized nature of many of its products, the Company is frequently required to
devote resources to sustaining engineering expenses, which are also included in
cost of product sales and are generally expensed as incurred.

Results of Operations

The percentage relationships to net sales of certain income and expense items
for the three years ended December 31, 1999 are contained in the following
table.

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                          ---------------------------
                                           1999      1998      1997
                                          -------   -------   -------
<S>                                       <C>       <C>       <C>
Net sales                                 100.00%   100.00%   100.00%
Cost of product sales                      77.92     81.02     81.11
                                          ------    ------    ------
  Gross profit                             22.08     18.98     18.89
                                          ------    ------    ------
Operating expenses:
  Selling                                   4.87      5.69      5.28
  General & administration                 11.19     12.33     12.76
  R&D                                       1.97      1.30       ---
                                          ------    ------    ------
                                           18.03     19.32     18.04
                                          ------    ------    ------
Income (loss) from operations               4.05      (.34)      .85
Other income                                1.14      1.45       .93
Interest expense                            (.05)      ---      (.47)
                                          ------    ------    ------
Income before provision
   (benefit) for income taxes               5.14      1.11      1.31
Provision (benefit) for income taxes        (.14)      .04     (5.83)
                                          ------    ------    ------
Net income                                  5.28%     1.07%     7.14%
                                          ======    ======    ======
</TABLE>

                                       25
<PAGE>

Years Ended December 31, 1999 and 1998

Net Sales.  Net sales for the year ended December 31, 1999 were $30.4 million,
an increase of $4.1 million, or 16% compared to the prior year.

The increase in sales was primarily attributable to the Company's Advanced
Ceramic Operations in Costa Mesa, California.  This increase was approximately
$3.7 million over the prior year.  Contributing to the increase was armor
products due to increasing demand for protective armor vests and helicopter wing
panels.  Orthodontic brackets also contributed to the increase over the prior
year due to the increased demand by orthodontists for the "Clarity" orthodontic
brackets.  The automotive product line had increased demand over the prior year
due to a new order for advanced technical ceramic components by a major diesel
engine manufacturer.  Additionally, sales of structural ceramics for
semiconductor equipment increased over the prior year period because of the
continued improvement in the semiconductor industry.  The Company has also
engaged in new research contracts in 1999 for the development of new structural
ceramic components with the U.S. Government.  However, the above product line
sales increases were slightly offset from the prior year due to reduced demand
for wear resistant components used on capital equipment machinery and oil
exploration ceramic components.

Additionally, the Company's Semicon Associates Division in Lexington, Kentucky,
posted a sales increase of $.4 million as compared to the prior year period.
The increase was mainly due to price increases and, to a lesser degree, the
introduction of extended cathode assemblies.

The Company's Thermo Materials Division in Scottdale, Georgia posted a slight
sales increase over the prior year.

International sales have and continue to be an important part of the Company's
business, representing 11% of the Company's net sales for the period ended
December 31, 1999.  This compares to 16% of net sales in the comparable prior
year period.  The decrease was mainly attributable to domestic increases in the
armor and orthodontic product lines.

Gross Profit.  The Company's gross profit was $6.7 million, or 22% of net sales,
for the year ended December 31, 1999, compared to $5.0 million, or 19% of net
sales, for the comparable prior year. The increase in gross profit for the year
ended December 31, 1999 as compared to the prior year was $1.7 million or 35%.

All of the major product lines at the Company's Advanced Ceramic Operations in
Costa Mesa, California, except for wear resistant components, had an increase in
gross profit as compared to the prior year period.  This result was due to
higher volume and higher capacity utilization resulting in favorable cost
absorption.  Hence, the favorable variance compared to the prior year period was
$1.2 million.

Gross profit for Semicon Associates in Lexington, Kentucky, had a favorable
variance over the comparable prior year period of $.4 million.  The increase in
the gross profit can be attributed to slightly higher production yields and
price increases.

Gross profit for Thermo Materials in Scottdale, Georgia, posted a favorable
variance of $.1 million compared to the prior year period.

                                       26
<PAGE>

Research and Development Expenses.  Research and development expenses were
approximately $.6 million for the year ended December 31, 1999 as compared to
$.35 million for the prior year.  The Company established a new research and
development department in 1998 to focus on new materials technology.  The
expenses incurred related to salaries, travel, outside services, materials and
small tools.

In addition, the Company historically has and continues to engage in application
engineering and internally-funded research to improve and reduce the cost of
production and to develop new products.  The costs associated with application
engineering and internally-funded research are generally expensed as incurred
and are included in cost of product sales.

Selling Expenses.  Selling expenses were $1.5 million for the years ended
December 31, 1999 and 1998.  Increases in salaries and travel expenses were
offset by a reduction in commission expense for the current year over the prior
comparable period.

General and Administrative Expenses.  General and administrative expenses were
$3.4 million for the year ended December 31, 1999, a $.2 million increase from
the prior year.  The key elements for the increase between the years was a
favorable settlement with a customer in the prior year resulting in net proceeds
of $.4 million.  However, this was offset in the prior year by a non-recurring
charge of $.2 million related to legal fees.  For the current year, increases in
salaries, consultant, and travel expenses were offset by a favorable settlement
in the final payment for the superfund cleanup of the Casmalia Disposal Site in
Santa Barbara County, California.

Other Income.  Other income was approximately $.3 million for the year ended
December 31, 1999 compared to $.4 million for the prior year.  The significant
difference for the decrease was the reduction of interest income due to lower
cash balances in the current year.

Interest Expense.  Interest expense was $16,000 for the year ended December 31,
1999 compared to none in the prior year.  The increase was caused by entering
into a capital equipment loan in 1999.

Income Taxes.  The Company has recorded a $44,000 net benefit for income tax for
the year ended December 31,1999.  The net benefit is the result of a refund of
Federal and State taxes from the prior year for $83,000.  This was offset by a
current year provision of $39,000.  It is anticipated that the Company will
utilize all of the Federal net operating loss carryforwards in the year 2001.

Net Income.  Reflecting all of the matters discussed above, net income was
$1,603,000 (or $.20 per share basic and diluted) for the year ended December 31,
1999 compared to a net income of $282,000 (or $.04 per share basic and diluted)
for the prior year.

Years Ended December 31, 1998 and 1997.

Net Sales.  Net sales for the year ended December 31, 1998 were $26.3 million, a
decrease of $2.4 million, or 8.4%, compared to the prior year.  The decrease in
sales is primarily related to the Advanced Ceramic Operations in Costa Mesa,
California.  Lightweight armor sales decreased due to delays in new government
production releases.  Wear resistant component sales decreased because of the
downturn in capital equipment shipments, and the low price of crude oil reduced
the demand for exploration components.  Orthodontic bracket sales decreased
because the Company's customer increased its inventory levels in 1997 due to the
introduction of the new "Clarity" orthodontic bracket, and reduced the level of
inventory in 1998 because of "just in time" inventory

                                       27
<PAGE>

practices. Structural ceramics for semiconductor equipment decreased from the
comparable prior year net sales because of the world-wide downturn in the
semiconductor industry.

The Company's Semicon Associates Division in Lexington, Kentucky posted a
decrease in net sales of approximately $.1 million from the prior comparable
period.  This was mainly caused by reduced demand for the first three quarters
of 1998 (as compared to the same period in the comparable prior year), for
dispenser cathodes and samarium cobalt permanent magnets.  However, for the 4th
Quarter 1998, demand for these products increased over the comparable prior
year's fourth quarter due to replacement parts procurement.

The Company's Thermo Materials Division in Scottdale, Georgia posted an increase
in net sales from the prior comparable period by approximately $.75 million.
The increase is due to missile radome shipments that are a result of the prior
year pilot production and an increase in fused silica ceramic components due to
an aggressive sales effort.  Also, and to a lesser extent, net sales increased
due to the purchase of the Masrock and Fusil Foam assets and business from
Harbison Refractories Company.  This was a small asset acquisition that the
Company completed in the 4th Quarter of 1998.

International sales have and continue to be an important part of the Company's
business, representing 16% of the Company's net sales for the period ended
December 31, 1998.  This compares to 20% of net sales in the comparable prior
year period.

Gross Profit.  The Company's gross profit was $5.0 million, or 19.0% of net
sales, for the year ended December 31, 1998, compared to $5.4 million, or 18.9%
of net sales, for the comparable prior year. The decrease in gross profit for
the year ended December 31, 1998 as compared to the prior year was $.4 million
or 8.0%.

All of the major product lines at the Company's Advanced Ceramic Operations in
Costa Mesa, California had decreases in gross profit as compared to the prior
year period due to lower volume and lower capacity utilization resulting in
unfavorable overhead absorption.  This resulted in a gross profit decrease of
$2.3 million as compared to the prior year.  Another key element that
contributed to the decrease was the charge of approximately $.3 million for
start-up costs associated with the semiconductor product line.

Gross profit for Semicon Associates in Lexington, Kentucky had an increase of
$1.8 million from the comparable prior year period.  The reason for the increase
was that in the prior year an adjustment of approximately $1.7 million to write
off inventory and to reduce inventory carrying amounts to net realizable values
was recorded.

Gross profit for Thermo Materials in Scottdale, Georgia increased approximately
$.4 million from the comparable prior year period.  The increase was the result
of increased volume, production yields, and greater capacity utilization.

Research and Development Expenses.  Research and development expenses were
approximately $.35 million for the year ended December 31, 1998.  The Company
established a new research and development department in 1998 to focus on new
materials technology.  The expenses incurred related to salaries, travel,
outside services, materials and small tools.

                                       28
<PAGE>

In addition, the Company historically has and continues to engage in application
engineering and internally-funded research to improve and reduce the cost of
production and to develop new products.  The costs associated with application
engineering and internally-funded research are generally expensed as incurred
and are included in cost of product sales.

Selling Expenses.  Selling expenses were $1.5 million for the years ended
December 31, 1998 and 1997.  Increases in direct salaries and travel expenses
were offset by a reduction in commission expense for the current year over the
prior comparable period.

General and Administrative Expenses.  General and administrative expenses were
$3.2 million for the year ended December 31, 1998, a $.4 million decrease from
the prior year.  The key elements for the decrease between the years was a non-
recurring charge in the prior year of $.2 million related to legal fees
associated with a legal settlement, coupled with a favorable settlement with a
customer in the current year resulting in net proceeds of $.4 million.  The
above decreases in expenses from the prior year were offset by a non-recurring
charge of $.2 million in the current year's 4th quarter.  This charge was the
result of written notification from the United States Environmental Protection
Agency that the Company was a responsible party in the Superfund cleanup of the
Casmalia Disposal Site in Santa Barbara County, CA.  The notification states
that Ceradyne, along with approximately 10,000 other parties, has been
designated as "de minimus" waste generator due to the relatively small
quantities of its waste disposal.  The Company properly disposed of this waste
material in the 1970's and 1980's, however the Casmalia Disposal Site leaked
into the water table.  Thus the waste generators must pay their share of the
cost of the cleanup effort.

Other Income and Expense.   Other income was approximately $.4 million for the
year ended December 31, 1998 compared to $.3 million for the prior year.  The
significant difference for the increase was the reduction of non-operational
miscellaneous expense that was incurred in the prior year.

Interest Expense.  The Company had no interest expense for the year ended
December 31, 1998.  The prior year had interest expense of $134,000.  The reason
for the decrease is the payment of all debt outstanding in the prior year.

Income Taxes.  The Company has recorded $10,000 provision for income tax for the
year ended December 31,1998.  The Company in the prior year reversed a portion
of the previously established valuation allowance, primarily related to net
operating losses from prior years to offset tax provisions at statutory rates.

Net Income.  Reflecting all of the matters discussed above, net income was
$282,000 (or $.04 per share basic and diluted) for the year ended December 31,
1998 compared to a net income of $2,050,000 (or $.26 per share basic and
diluted) for the prior year.

Year 2000 Disclosure.  Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates.  This inability to recognize or
properly treat the Year 2000 may cause the Company's systems and applications to
process critical financial and operational information incorrectly.  The Company
has and continues to assess any impact of the Year 2000 issue on its reporting
systems and operations.

                                       29
<PAGE>

The Company did not experience any Year 2000 issues within or outside the
Company in the millennium change or the leap year day of February 29, 2000.  The
costs associated with getting prepared for Year 2000 issues were as previously
stated, approximately $150,000.  Also, the Company has not experienced any
unusual patterns or trends from the Year 2000 issue.

Liquidity and Capital Resources

The Company generally meets its operating and capital requirements for cash flow
from operating activities and borrowings under its credit facility.

In November 1997, the Company entered into a revolving credit agreement with
Comerica Bank.  The credit facility amount remains at $4,000,000 as of year
ended December 31, 1999 and no collateral is required of the Company.  As of
December 31, 1999 there had been no borrowing under this credit facility.  Under
a separate credit facility with Comerica Bank, the Company entered into a
$500,000 capital equipment loan agreement during the third quarter of 1999.  The
term of the loan is for 60 months with no prepayment penalty.

Management believes that its current cash and cash equivalents on hand, as well
as cash generated from operations and the ability to borrow under the existing
credit facility, will be sufficient to finance anticipated capital and operating
requirements for at least the next 12 months.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."  SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000.  SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value.  Currently, the Company does not have any instruments that would qualify
as derivatives under SFAS No. 133.  Accordingly, the Company does not believe
SFAS No. 133 will have a material impact on the Company's financial position,
results of operations, or liquidity at the current time.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk
         ---------------------------------------------------------

The Company is exposed to market risks related to fluctuations in interest rates
on its debt.  Currently, the Company does not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types
of derivative financial instruments.  The purpose of the following analysis is
to provide a framework to understand the Company's sensitivity to hypothetical
changes in interest rates as of December 31, 1999.  Many of the statements
contained in this section are forward looking and should be read in conjunction
with the Company's disclosures under the heading "Risk Factors".

The Company utilized debt financing during 1999 primarily for the purpose of
acquiring manufacturing equipment.  For fixed rate debt, changes in interest
rates generally affect the fair market value of the debt instrument, but not the
Company's earnings or cash flows.  The Company does not have an obligation to
prepay fixed rate debt prior to maturity, and as a result, interest rate risk
and changes in fair market value should not have a significant impact on the
fixed rate debt until the company would be required to refinance such debt.  The
fair market value estimates for debt securities are based on discounting future
cash flows utilizing current rates offered to the Company for debt of the same
type and remaining maturity.

                                       30
<PAGE>

As of December 31, 1999, the Company's debt consisted of a $458,000 capital
equipment loan at a fixed interest rate of 8.18% due June 28, 2004.  The
carrying amount is a reasonable estimate of fair value as the rate of interest
paid on the note approximates the current rate available for financing with
similar terms and maturities.

Item 8.  Consolidated Financial Statements and Supplementary Data
         --------------------------------------------------------

The Consolidated Financial Statements and Supplementary Data commence at page 47
of this report and an index thereto is included in Part IV, Item 14 of this
report on page 42.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         ---------------------------------------------------------------
Financial Disclosure
--------------------

Not applicable

                                       31
<PAGE>

                                    PART III


Item 10.  Directors and Executive Officers of Registrant
          ----------------------------------------------

  Information regarding executive officers of the Company is included in Part I
of this report.

  The Directors of the Company are as follows:

<TABLE>
<CAPTION>
         Name               Age                   Position
----------------------    ------   ------------------------------------
<S>                       <C>      <C>
Joel P. Moskowitz.....      60     Chairman of the Board, President and
                                   Chief Executive Officer
Leonard M. Allenstein.      61     Director
Richard A. Alliegro...      69     Director
Peter Beardmore.......      63     Director
Frank Edelstein.......      74     Director
Milton L. Lohr........      74     Director
Melvin A. Shader......      74     Director
</TABLE>

  Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as
President of the Company from 1974 until January 1987, and from September 1987
to the present.  Mr. Moskowitz currently serves as Chairman of the Board and
Chief Executive Officer of the Company, which positions he has held since 1983.
Mr. Moskowitz currently serves on the Board of Trustees of Alfred University.
Mr. Moskowitz obtained a B.S. in Ceramic Engineering from Alfred University in
1961 and an M.B.A. from the University of Southern California in 1966.

  Leonard M. Allenstein has served on the Board of Directors of the Company
since 1983. Mr. Allenstein has been a private investor and businessman for
several years.  Mr. Allenstein was a founder and general partner of Bristol
Restaurants, which owns and operates restaurants in the Southern California
area, from 1978 until December 1986.

  Richard A. Alliegro has served on the Board of Directors of the Company since
1992.  Mr. Alliegro retired from Norton Company in 1990 after 33 years, where
his last position was Vice President, Refractories and Wear, for Norton's
Advanced Ceramics operation.  He served as President of Lanxide Manufacturing
Co., a subsidiary of Lanxide Corporation, from May 1990 to February 1993.  Mr.
Alliegro currently is the owner of AllTec Consulting, Inc., a ceramic technology
consulting firm.  Mr. Alliegro obtained B.S. and M.S. degrees in Ceramic
Engineering from Alfred University in 1951 and 1952, respectively, and serves as
a member of the Board of Trustees of that university.

  Dr. Peter Beardmore is the Director of the Chemical and Physical Sciences
Laboratory of Ford Motor Company.  He has been associated with Ford since 1966.
Dr. Beardmore has a B. MET. in Metallurgy from the University of Sheffield, and
a Ph.D. in Metallurgy from the University of Liverpool.  Dr. Beardmore was
elected to the Board of Directors of the Company in 1996.

  Frank Edelstein has served on the Board of Directors of the Company since
1984.  Mr. Edelstein has been a Vice President of Stone Creek Capital, Inc., an
investment banking firm, since

                                       32
<PAGE>

November 1986. From 1979 to November 1986, he was Chairman of the Board of
International Central Bank & Trust Company, which was acquired by Continental
Insurance Co. in July 1983. Mr. Edelstein is currently a director of Arkansas
Best Corp. and IHOP Corp.

  Milton L. Lohr served as a Director of the Company from 1986 until October
1988, when he resigned to accept a position as Deputy Undersecretary of Defense
for Acquisitions.  He held that position until May 1989 and was re-elected as a
Director of the Company in July 1989.  Mr. Lohr is currently the President of
Defense Development Corporation, a defense-related research and development
company.  Mr. Lohr previously held the position of Senior Vice President of
Titan Systems, a defense-related research and development company, from 1986 to
1988, and was founder and President of Defense Research Corporation, a defense
consulting firm, from 1983 to 1986.  Mr. Lohr served from 1969 to 1983 as
Executive Vice-President of Flight Systems, Inc., a firm engaged in aerospace
and electronic warfare systems.  Mr. Lohr has over thirty-five years experience
in government positions and aerospace and defense management.  He currently
serves as a panel member of the President's Science Advisory Committee, a member
of the Office of the Secretary of Defense, Army Science Board, as well as other
ad hoc government related assignments.

  Melvin A. Shader has served on the Board of Directors of the Company since
1984. Dr. Shader retired in 1991 from TRW, Inc., where he was Vice President,
Business Development and Vice President, International at the Space and Defense
Sector of TRW, Inc.  Dr. Shader had been with TRW, Inc. since 1970.  From 1969
to 1970, Dr. Shader was Director of Planning in the Information Network Division
of Computer Sciences Corp.   From 1954 to 1968, he was an executive with
International Business Machines Corp.

Directors are elected annually and hold office until the next annual meeting of
stockholders and until their successors have been elected and qualified.  The
Company has agreed to nominate a representative of Ford for election as a
Director pursuant to an agreement made in March 1986, pursuant to which
agreement Ford acquired a total of 1,207,299 shares of the Company's Common
Stock.  Joel P. Moskowitz and members of his family have agreed to vote a
portion of their shares of the Company's Common Stock, if necessary, for the
election of Ford's nominee.  Dr. Peter Beardmore is Ford's current
representative.  Officers serve at the discretion of the Board of Directors
except for Mr. Moskowitz, who serves pursuant to a two-year employment agreement
which expires in July 2001.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.

     To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1999, its
officers, directors and greater than ten percent beneficial owners complied with
all Section 16(a) filing requirements.

                                       33
<PAGE>

Item 11.  Executive Compensation
          ----------------------

Summary Compensation Table
--------------------------

The following table shows certain information concerning the compensation of the
Chief Executive Officer and five other most highly compensated executive
officers of the Company whose aggregate compensation for services in all
capacities rendered during the year ended December 31, 1999 exceeded $100,000
(collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>

                                                                   Long Term
                                                                 Compensation
                                                                 -------------
                                                                  Securities
Name &                           Annual Compensation              Underlying
-----                    ------------------------------------       Options
Principal Position         Year       Salary         Bonus       (# of Shares)
----------------------   --------   -----------   -----------    -------------
<S>                      <C>        <C>           <C>            <C>
Joel P. Moskowitz            1999      $240,085       $16,027                -
Chairman of the              1998       228,191             -                -
 Board, Chief                1997       212,988        19,976                -
 Executive Officer
 and President

Earl E. Conabee              1999      $106,872             -                -
Vice President               1998       101,220             -            4,000
                             1997        96,731             -            2,000

Gerhart D. DeBoer(1)         1999      $106,068        11,000            5,000
Vice President               1998       102,270             -            5,000
                             1997        36,705             -           20,000

Howard F. George             1999      $104,327             -                -
Vice President               1998       101,062             -            5,000
                             1997        94,300       $ 6,210                -

Donald A. Kenagy             1999      $108,350             -            5,000
Vice President               1998       103,142             -            4,000
                             1997        98,411             -            2,000

David P. Reed                1999      $132,919             -            5,000
Vice President               1998       121,295             -           10,000
                             1997       118,056       $24,594           13,500
</TABLE>

(1)Mr. DeBoer's employment with the Company commenced in September 1997.

                                       34
<PAGE>

Option Grants in Last Fiscal Year
---------------------------------

   The following table sets forth certain information concerning grants of
options to each of the Named Executive Officers during the year ended December
31, 1999.  In addition, in accordance with the rules and regulations of the
Securities and Exchange Commission, the following table sets forth the
hypothetical gains or "option spreads" that would exist for the options.  Such
gains are based on assumed rates of annual compound stock appreciation of 5% and
10% from the date on which the options were granted over the full term of the
options.  The rates do not represent the Company's estimate or projection of
future Common Stock prices, and no assurance can be given that any appreciation
will occur or that the rates of annual compound stock appreciation assumed for
the purposes of the following table will be achieved.
<TABLE>

                                                                                     Potential Realizable
                                                                                  Value at Assumed Annual
                                          Percent of                                 Rates of Stock Price
                                         Total Options                               Appreciation for
                                         Granted to       Exercise                   Option Term(2)
                      Options Granted    Employees in     Price       Expiration     --------------
Name                  (# of Shares)(1)   Fiscal Year      ($/Share)   Date           5%($)     10%($)
----                  ----------------   -------------    --------    ----------     -----     -----
<S>                   <C>                <C>              <C>         <C>           <C>      <C>
Joel P. Moskowitz         -               -                -           -              -      -
David P. Reed             5,000          4.3%             3.250        1/08/09      10,220    25,898
                          5,000          4.3%             3.531        9/23/09      11,103    28,138
Howard F. George          -                -                -            -            -         -
Earl E. Conabee           -                -                -            -            -         -
Donald A. Kenagy          5,000          4.3%             3.250        1/08/09      10,220    25,898
Gerhart D. DeBoer         5,000          4.3%             3.250        2/08/09      10,220    25,898
</TABLE>
--------------
(1)  The per share exercise price of all options granted is the fair market
     value of the Company's Common Stock on the date of grant.  Options have a
     term of 10 years and become exercisable in five equal installments, each of
     which vests at the end of each year after the grant date, except for Mr.
     DeBoer, whose options have a term of two years and became exercisable on
     October 30, 1999.

(2)  The potential realizable value is calculated from the exercise price per
     share, assuming the market price of the Company's Common Stock appreciates
     in value at the stated percentage rate from the date of grant to the
     expiration date.  Actual gains, if any, are dependent on the future market
     price of the Common Stock.

                                       35
<PAGE>

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
--------------------------------------------------------------------------
Values
------

     The following table sets forth certain information regarding option
exercises during the year ended December 31, 1999 by the Named Executive
Officers, the number of shares covered by both exercisable and unexercisable
options as of December 31, 1999 and the value of unexercised in-the-money
options held by the Named Executive Officers as of December 31, 1999:


<TABLE>
<CAPTION>
                                                                                                       Value of Unexercised
                                                            Number of Securities Underlying          In-the-Money Options at
                    No. of Shares                        Unexercised Options at Fiscal Year-End         Fiscal Year-End(1)
                     Acquired on        Value            --------------------------------------   ----------------------------
      Name            Exercise         Realized            Exercisable          Unexercisable     Exercisable    Unexercisable
      ----           -----------       --------          ----------------      ----------------   -----------    -------------
<S>                 <C>                <C>               <C>                   <C>                <C>            <C>
Joel P. Moskowitz         --               --                    --                     --              --             --
David P. Reed           2,500           $6,875                38,400                 27,100         $109,249       $42,439
Howard F. George          --               --                 21,000                  9,000            3,500        14,000
Earl E. Conabee         3,000            8,250                 1,600                  4,400            1,400         5,600
Donald A. Kenagy          --               --                  6,600                  9,400           11,400        21,850
Gerhart D. DeBoer         --               --                 30,000                    --            35,155           --
</TABLE>

(1) Based upon the closing price of the Common Stock on December 31, 1999, as
    reported by the Nasdaq National Market ($4.563 per share).

                                      36
<PAGE>

Employment Agreement
--------------------

  In July 1994, the Company entered into a five-year employment agreement with
Mr. Moskowitz, pursuant to which he will serve as Chairman of the Board of
Directors, Chief Executive Officer and President of the Company.  In February,
2000, the agreement was extended to July, 2001.  Effective February 23, 2000,
Mr. Moskowitz' base annual salary under this agreement was increased to
$259,000.  Under the agreement, if Mr. Moskowitz' employment is terminated by
the Company (other than as a result of death, incapacity or for "good cause" as
defined in the agreement) or if Mr. Moskowitz elects to resign for "good reason"
(as defined in the agreement), Mr. Moskowitz will be entitled to receive
severance pay in an amount equal to his annual base salary, at the rate in
effect on the date of termination, payable on normal pay dates for the remainder
of the term of the agreement.  "Good reason" includes a "change in control" of
the Company, a removal of Mr. Moskowitz from any of his current positions with
the Company without his consent, or a material change in Mr. Moskowitz' duties,
responsibilities or status without his consent.  A "change in control" of the
Company shall be deemed to occur if (1) there is a consolidation or merger of
the Company where the Company is not the surviving corporation and the
shareholders prior to such transaction do not continue to own at least 80% of
the common stock of the surviving corporation, (2) there is a sale of all, or
substantially all, of the assets of the Company, (3) the stockholders approve a
plan for the liquidation or dissolution of the Company, (4) any person becomes
the beneficial owner, directly or indirectly, of 30% or more of the Company's
outstanding Common Stock or (5) if specified changes in the composition of the
Company's Board of Directors occur.

Compensation of Directors
-------------------------

  Directors are paid fees for their services on the Board of Directors in such
amounts as are determined from time to time by the Board.  During 1999, a fee of
$500 per month plus $1000 for each Board meeting attended was paid to each non-
employee director other than the Ford representative, Dr. Beardmore, who did not
receive a fee.

Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------

  The Board of Directors has established Audit, Compensation and Stock Option
Committees.  The Compensation Committee's function is to review and make
recommendations to the Board regarding executive officers' compensation.  This
committee is composed of Messrs. Beardmore, Edelstein, Alliegro, Shader and
Lohr.  The Audit Committee meets with the Company's independent public
accountants to review the Company's financial condition and internal accounting
controls.  This committee is composed of Messrs. Edelstein, Beardmore, Shader
and Lohr.  The Stock Option Committee is composed of Mr. Moskowitz and Dr.
Beardmore.  This committee administers the Company's 1994 Stock Incentive Plan
and the 1995 Employee Stock Purchase Plan.  Dr. Beardmore is serving as Ford's
representative on the Board of Directors.

                                       37
<PAGE>

Item 12.    Security Ownership of Certain Beneficial Owners and Management
            --------------------------------------------------------------
  The following table sets forth information as of March 3, 2000, regarding the
beneficial ownership of the common stock of the Company by (i) each person or
group known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each of the directors of the Company,
(iii) each of the executive officers named in the Summary Compensation Table,
and (iv) all current executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
     Name of            Amount and Nature of        Percent
 Beneficial Owner       Beneficial Ownership(1)    of Class
 -----------------       -----------------------    --------
<S>                     <C>                        <C>
Joel P. Moskowitz                 1,163,110          14.4%
3169 Redhill Avenue
Costa Mesa, CA 92626

Ford Motor Company                1,207,299          14.9%
The American Road
Dearborn, MI 48121

Dimensional Fund Advisors, Inc.     544,900 (2)       6.7%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401

Leonard M. Allenstein               115,000 (3)       1.4%

Richard A. Alliegro                  24,500 (4)        *

Earl E. Conabee                      31,184 (5)        *

Dr. Peter Beardmore                      -             -

Garhart D. DeBoer                    30,000 (6)        *

Frank Edelstein                      45,400 (7)        *

Donald A. Kenagy                     19,195 (8)        *

Melvin A. Shader                     28,000 (9)        *

Milton L. Lohr                       25,000 (10)       *

David P. Reed                        64,067 (11)       *

Howard F. George                     21,557 (12)       *

All current executive             1,567,013          19.4%
officers and directors as a
group (12 persons above)
</TABLE>

                                       38
<PAGE>

*    Less than 1%


(1)  Except as otherwise noted, the beneficial owners have sole voting and
     investment powers with
     respect to the shares indicated, subject to community property laws where
     applicable.

(2)  Based on information contained in a statement on Schedule 13G dated
     February 14, 2000, as filed with the Securities and Exchange Commission.
     As stated in such Schedule 13G, all shares are held on behalf of advisory
     clients of Dimensional Fund Advisors, Inc., which disclaims beneficial
     ownership of such shares.

(3)  Includes 25,000 shares subject to options held by Mr. Allenstein which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(4)  Includes 20,000 shares subject to options held by Mr. Alliegro which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(5)  Includes 6,000 shares subject to options held by Mr. Conabee which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(6)  Includes 30,000 shares subject to options held by Mr. DeBoer which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(7)  Includes 27,500 shares subject to options held by Mr. Edelstein which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(8)  Includes 8,400 shares subject to options held by Mr. Kenagy which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(9)  Includes 15,000 shares subject to options held by Dr. Shader which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(10) Includes 25,000 shares subject to options held by Mr. Lohr which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(11) Includes 42,100 shares subject to options held by Mr. Reed which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

(12) Includes 21,000 shares subject to options held by Mr. George which are
     currently exercisable or will become exercisable within 60 days of March 3,
     2000.

                                       39
<PAGE>

Item 13.  Certain Relationships and Related Transactions
          ----------------------------------------------

     On March 11, 1986, the Company sold 526,316 shares of its Common Stock to
Ford Motor Company ("Ford") at a price of $19.00 per share, for a total purchase
price of $10,000,000.  At the same time, the Company and Ford created a new
corporation, Ceradyne Advanced Products, Inc. ("CAPI"), and entered into
agreements involving a broad-based technology transfer, licensing and joint
development program.  Under the agreements, Ford contributed technology and a
portfolio of United States and foreign patents relating to technical ceramics to
CAPI in exchange for 80% of CAPI's capital stock, and Ceradyne acquired the
remaining 20% of CAPI in exchange for $200,000.  The technology and patents
contributed by Ford were developed in the Ford Research Laboratories over a 15-
year period.  Under the March 11, 1986 agreements, the Company was granted an
option to acquire Ford's 80% interest in CAPI in exchange for an additional
680,983 shares of Ceradyne Common Stock, which the Company exercised effective
February 12, 1988.  As a result, Ceradyne now owns 100% of CAPI and Ford owns a
total of 1,207,299 shares of the Company's Common Stock.  The Company and Ford
also entered into a joint development agreement which includes a commitment by
Ford to contribute up to $5,000,000, on a matching value basis with Ceradyne,
for the development by Ceradyne of technical ceramic products oriented towards
the automotive market.  Through December 31, 1999, Ford has contributed to the
Company, on a cost sharing basis, a total of $4.8 million in cash and equipment
under this joint development program.

     So long as Ford continues to own 5%, or more, of the Company's outstanding
common stock, Ceradyne has agreed to use its best efforts to cause one person
designated by Ford to be elected a member of the Ceradyne Board of Directors
and, under certain circumstances in the event the Company issues additional
shares of its Common Stock in a public or private transaction, to permit Ford to
purchase, at the same price and terms upon which sold by the Company in such
transaction, additional shares of Ceradyne Common Stock to enable Ford to
maintain its percentage ownership of the Company.

     In connection with the sale of stock to Ford, Joel P. Moskowitz, Chairman
of the Board, Chief Executive Officer and President of the Company, and members
of his immediate family agreed to vote shares of the Company's Common Stock
owned by them in favor of the election of Ford's nominee to the Board of
Directors.  However, they may first vote that number of shares that is necessary
to assure the election of Joel P. Moskowitz as a Director of the Company, and
any shares that are not necessary to assure the election of Mr. Moskowitz and a
Ford nominee to the Board of Directors may be voted by them without restriction.

                                       40
<PAGE>

                                    PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
           ---------------------------------------------------------------

(a) List of documents filed as part of this report:

  (1) Financial Statements:                                             Page
      ---------------------                                             ----

      Report of Independent Public Accountants                          46
      Consolidated Balance Sheets at December 31, 1999 and 1998         47-48
      Consolidated Statements of Operations for
        the Years Ended December 31, 1999, 1998 and 1997                49
      Consolidated Statements of Stockholders Equity for
        the Years Ended December 31, 1999, 1998, and 1997               50
      Consolidated Statements of Cash Flows for the Years ended
        December 31, 1999, 1998 and 1997                                51-52
      Notes to Consolidated Financial Statements                        53-65

  (2) Financial Statement Schedules:
      ------------------------------

      Schedule VIII -- Valuation and Qualifying Accounts                66

      All other schedules are omitted since the required information is not
      present or is not present in amounts sufficient to require submission of
      the schedule, or because the information required is included in the
      Consolidated Financial Statements and Notes thereto.

(b) The following reports on Form 8-K were filed during the last quarter of the
    fiscal year ended  December 31, 1999:

    None

(c) List of Exhibits

    3.1   Certificate of Incorporation of the Registrant.  Incorporated herein
          by reference to Exhibit 3.1 to the Registrant's Registrant Statement
          on Form 8-B.

    3.2   Bylaws of  Registrant. Incorporated herein by reference to Exhibit 3.2
          to the Registrant's Form 10-Q Report for the period ended June 30,
          1996.

    3.3   Amendment to Bylaws of Registrant, adopted April 29, 1996.
          Incorporated herein by reference to Exhibit 3.3 to the Registrant's
          Form 10-Q Report for the period ended June 30, 1996.

    4.1   Form of Representatives' Common Stock Purchase Warrant. Incorporated
          herein by reference to Exhibit 4.1 to the Registrant's Registration
          Statement on Form S-1 (File No. 33-62345).

                                       41
<PAGE>

    10.1* Ceradyne, Inc. 1983 Stock Option Plan as amended and restated.
          (Incorporated by reference from Exhibit 10.13 to the Company's
          Registration Statement on Form S-1 (File No. 2-99930) filed
          on September 25, 1985 (the "1985 S-1").

    10.2  Lease between Trico Rents and the Registrant dated March 23, 1984,
          covering premises located at 235 Paularino Avenue, Costa Mesa,
          California. Incorporated herein by reference to Exhibit 10.14 to the
          Registrant's Registration Statement on Form S-1 (File No. 2-90821).

    10.3  Lease covering premises located at 3169-A Red Hill Avenue, Costa
          Mesa, California dated October 28, 1985.  Incorporated herein by
          reference to Exhibit 10.30 to the Registrant's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1985.

    10.4  Stock Sale Agreement between the Registrant and Ford Motor Company
          dated March 11, 1986. Incorporated herein by reference to Exhibit
          10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
          year ended December 31, 1985.

    10.5  Agreement between certain shareholders of the Registrant and Ford
          Motor Company dated March 11, 1986. Incorporated herein by reference
          to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
          the year ended December 31, 1985.

    10.6  Stock Purchase Agreement between Ceradyne Advanced Products, Inc., the
          Registrant and Ford Motor Company dated March 11, 1986. Incorporated
          herein by reference to Exhibit 10.33 to the Registrant's Annual
          Report on Form 10-K for the fiscal year ended December 31, 1985.

    10.7  Patent and Technology Transfer Agreement between Ford Motor Company
          and Ceradyne Advanced Products, Inc. dated March 11, 1986.
          Incorporated herein by reference to Exhibit 10.34 to the Registrant's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1985.

    10.8  License Agreement between the Registrant and Ceradyne Advanced
          Products, Inc. dated March 11, 1986. Incorporated herein by
          reference to Exhibit 10.35 to the Registrant's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1985.

    10.9  License Agreement between Ford Motor Company and the Registrant dated
          March 11, 1986. Incorporated herein by reference to Exhibit 10.36 to
          the Registrant's Annual Report on Form 10-K for the fiscal year ended
          December 31, 1985.

    10.10 Joint Development Agreement between the Registrant and Ford Motor
          Company dated March 11, 1986. Incorporated herein by reference to
          Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for
          the fiscal year ended December 31, 1985.

    10.11 Lease dated March 31, 1986 covering premises located at 3163
          Red Hill Avenue, Costa Mesa, California. Incorporated herein by
          reference to Exhibit 10.45 to the Registrant's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1986.

                                       42
<PAGE>

    10.12  Lease dated August 5, 1986 covering premises located at 225
           Paularino Avenue, Costa Mesa, California. Incorporated herein
           by reference to Exhibit 10.46 to the Registrant's Annual
           Report on Form 10-K for the fiscal year ended December
           31, 1986.

    10.13  Short-form Memorandum of Lease Assignment dated December 15, 1986,
           and Lease dated June 23, 1980, covering premises located at
           3449 Church Street, Scottdale, Georgia. Incorporated herein by
           reference to Exhibit 10.47 to the Registrant's Annual Report on
           Form 10-K for the fiscal year ended December 31, 1986.

    10.14* Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.50 to
           the Registrant's Annual Report on Form 10-K for the fiscal year
           ended December 31, 1986.

    10.15* Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.51 to
           the Registrant's Annual Report on Form 10-K for the fiscal year
           ended December 31, 1986.

    10.16  Joint Development Agreement dated March 28, 1986 between Unitek
           Corporation and the Registrant, and First and Second Amendments
           thereto. Incorporated herein by reference to Exhibit 10.52 to the
           Registrant's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1986.

    10.17* Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock
           Option Plan. Incorporated herein by reference to Exhibit 10.56 to
           the Registrant's Registration Statement on Form 8-B.

    10.18* Employment Agreement entered into as of July 5, 1994 by and between
           Joel P. Moskowitz and the Registrant. Incorporated herein by
           reference to Exhibit 10.30 to the Registrant's Annual Report on
           Form 10-K for the fiscal year ended December 31, 1994.

    10.19* Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by
           reference to Exhibit 10.31 to the Registrant's Annual Report on
           Form 10-K for the fiscal year ended December 31, 1994.

    10.20* Amendment No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 4.2 to Registrant's
           Registration Statement on Form S-8 (File No. 33-61675).

    10.21* Ceradyne, Inc. 1995 Employee Stock Purchase Plan.  Incorporated
           herein by reference to Exhibit 4.1 to Registrant's Registration
           Statement on Form S-8 (File No. 33-61677).

    10.22  Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and
           the Registrant covering premises located at 235 Paularino Avenue,
           Costa Mesa, California. Incorporated herein by reference to Exhibit
           10.32 to the Registrant's Registration Statement on Form S-1 (File
           No. 33-62345).

    10.23  Amendment No. 2, dated June 5, 1995, to Lease covering premises
           located at 3169-A Red Hill Avenue, Costa Mesa, California.
           Incorporated herein by reference to Exhibit 10.33 to the
           Registrant's Registration Statement on Form S-1 (File No. 33-62345).

                                       43
<PAGE>

    10.24  Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986
           covering premises located at 3163 Red Hill Avenue, Costa Mesa,
           California.  Incorporated herein by reference to Exhibit 10.34 to
           the Registrant's Registration Statement on Form S-1 (File No.
           33-62345).

    10.25  Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986
           covering premises located at 225 Paularino Avenue, Costa Mesa,
           California. Incorporated herein by reference to Exhibit 10.35 to the
           Registrant's Registration Statement on Form S-1 (File No. 33-62345).

    10.26* Amendment No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 10.36 to the Registrant's
           Annual report on Form 10-K for the fiscal year ended December 31,
           1996.

    10.27* Amendment No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 4.4 to Registrant's
           Registration Statement on Form S-8 (File No. 333-31679).

    10.28* Amendment No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
           Incorporated herein by reference to Exhibit 10.28 to the Registrant's
           Annual report on Form 10-K for the fiscal year ended December 31,
           1998.

    21.1   Subsidiaries of the Registrant.  Incorporated herein by reference to
           Exhibit 23.2 to the Registrant's Statement on Form S-1 (File No.
           33-62345).

    23.1   Consent of Arthur Andersen LLP.

    27.1   Financial Data Schedule.

    *      Each of these exhibits constitutes a management contract,
           compensatory plan, or arrangement required to be filed as an exhibit
           to this Report pursuant to Item 14(c) of this Report.

                                       44
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Directors
   of Ceradyne, Inc.:

We have audited the accompanying consolidated balance sheets of Ceradyne, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ceradyne, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. the schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


                                                 /s/ Arthur Andersen LLP

                                                 ARTHUR ANDERSEN LLP



Orange County, California
March 3, 2000

                                      45
<PAGE>

                                CERADYNE, INC.
                                --------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                          DECEMBER 31, 1999 AND 1998
                          --------------------------
<TABLE>
<CAPTION>

                                    ASSETS
                                    ------
                            (Amounts in thousands)
                                                                 1999        1998
                                                                 ----        ----
CURRENT ASSETS:
<S>                                                           <C>         <C>
 Cash and cash equivalents                                    $  1,407    $  2,870
 Accounts receivable, net of allowances of
  approximately $39 and $92 for doubtful
  accounts in 1999 and 1998, respectively                        5,837       4,381
 Other receivables                                                  98         167
 Inventories                                                     8,452       7,520
 Production tooling                                              1,343       1,104
 Prepaid expenses and other                                      1,147         880
                                                              --------    --------
   Total current assets                                         18,284      16,922
                                                              --------    --------


PROPERTY, PLANT AND EQUIPMENT:
 Land                                                              422         422
 Buildings and improvements                                      1,825       1,825
 Machinery and equipment                                        23,462      20,664
 Leasehold improvements                                          1,870       1,723
 Office equipment                                                2,456       2,210
 Construction in progress                                          700         103
                                                              --------    --------
                                                                30,735      26,947
  Less--Accumulated depreciation and amortization              (19,733)    (18,090)
                                                              --------    --------
                                                                11,002       8,857
                                                              --------    --------
COSTS IN EXCESS OF NET ASSETS ACQUIRED,
 net of accumulated amortization of $2,071 and $1,908 in
 1999 and 1998, respectively                                     1,846       2,009
                                                              --------    --------

OTHER ASSETS, net of accumulated amortization of
 $645 and $618 in 1999 and 1998, respectively                    1,761       1,705
                                                              --------    --------

   Total assets                                               $ 32,893    $ 29,493
                                                              ========    ========

</TABLE>


                  The accompanying notes are an integral part
                     of these consolidated balance sheets.

                                       46
<PAGE>

                                CERADYNE, INC.
                                --------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                          DECEMBER 31, 1999 AND 1998
                          --------------------------

                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
                   (Amounts in thousands, except share data)
<TABLE>
<CAPTION>

                                                            1999       1998
                                                          --------   ---------
<S>                                                       <C>        <C>
CURRENT LIABILITIES:
  Current maturities of long-term debt                    $   100    $    ---
  Accounts payable                                          2,214       1,084
  Accrued expenses:
    Payroll and payroll related                               665         553
    Other                                                     149         234
                                                          -------    --------
          Total current liabilities                         3,128       1,871
                                                          -------    --------

LONG-TERM DEBT, less current maturities                       358         ---
                                                          -------    --------

DEFERRED REVENUE                                              270         270
                                                          -------    --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Common stock, $.01 par value:
        Authorized--12,000,000 shares
        Outstanding--8,095,848 and 8,054,838 shares
         in 1999 and 1998, respectively                    37,900      37,718
    Accumulated deficit                                    (8,763)    (10,366)
                                                          -------    --------

          Total stockholders' equity                       29,137      27,352
                                                          -------    --------

          Total liabilities and stockholders' equity      $32,893    $ 29,493
                                                          =======    ========

</TABLE>

                  The accompanying notes are an integral part
                     of these consolidated balance sheets.

                                       47
<PAGE>

                                CERADYNE, INC.
                                --------------

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
             ----------------------------------------------------
                 (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>

                                            1999       1998       1997
                                          --------   --------   --------
<S>                                       <C>        <C>        <C>
NET SALES                                 $30,382    $26,279    $28,693

COST OF PRODUCT SALES                      23,674     21,292     23,274
                                          -------    -------    -------

    Gross profit                            6,708      4,987      5,419
                                          -------    -------    -------

OPERATING EXPENSES:
 Selling                                    1,480      1,494      1,515
 General and administrative                 3,400      3,239      3,660
 Research and development                     597        344        ---
                                          -------    -------    -------

                                            5,477      5,077      5,175
                                          -------    -------    -------

    Income (loss) from operations           1,231        (90)       244
                                          -------    -------    -------

OTHER INCOME (EXPENSE):
 Other income                                 344        382        265
 Interest expense                             (16)       ---       (134)
                                          -------    -------    -------
                                              328        382        131
                                          -------    -------    -------

   Income before provision (benefit)
    for income taxes                        1,559        292        375

PROVISION (BENEFIT) FOR INCOME
  TAXES                                       (44)        10     (1,675)
                                          -------    -------    -------

    Net income                            $ 1,603    $   282    $ 2,050
                                          =======    =======    =======

BASIC INCOME PER SHARE                       $.20       $.04       $.26
                                          =======    =======    =======

DILUTED INCOME PER SHARE                     $.20       $.04       $.26
                                          =======    =======    =======

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING:
    Basic                                   8,070      8,005      7,931
                                          =======    =======    =======
    Diluted                                 8,189      8,068      8,035
                                          =======    =======    =======
</TABLE>
                  The accompanying notes are an integral part
                       of these consolidated statements.

                                       48
<PAGE>

                                CERADYNE, INC.
                                --------------

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                -----------------------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
             ----------------------------------------------------
                   (Amounts in thousands, except share data)

<TABLE>
<CAPTION>


                                    Common Stock
                                    ------------
                                   Number             Accumulated
                                 of Shares   Amount     Deficit
                                 ---------   ------     -------
<S>                             <C>          <C>       <C>

BALANCE, December 31, 1996       7,901,790   $37,138  $(12,698)


  Issuance of common stock          37,469       202        ---
  Exercise of stock options         24,200        68        ---
  Net income                           ---       ---      2,050
                                 ---------   -------   --------

BALANCE, December 31, 1997       7,963,459    37,408    (10,648)

  Issuance of common stock          50,179       197        ---
  Exercise of stock options         41,200       113        ---
  Net income                           ---       ---        282
                                 ---------   -------   --------

BALANCE, December 31, 1998       8,054,838    37,718    (10,366)

  Issuance of common stock          30,741       154        ---
  Exercise of stock options         10,269        28        ---
  Net income                           ---       ---      1,603
                                 ---------   -------   --------

BALANCE, December 31, 1999       8,095,848   $37,900   $ (8,763)
                                 =========   =======   ========

</TABLE>


                  The accompanying notes are an integral part
                       of these consolidated statements.

                                       49
<PAGE>

                                CERADYNE, INC.
                                --------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
             ----------------------------------------------------
                            (Amounts in thousands)
<TABLE>
<CAPTION>


                                                            1999       1998       1997
                                                          --------   --------   --------
<S>                                                       <C>        <C>        <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                              $ 1,603    $   282    $ 2,050
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                          1,835      1,505      1,361

  Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable, net       (1,456)       304        169
     Decrease (increase) in other receivables                  69        (71)     1,301
     (Increase) decrease in inventories                      (932)      (154)       390
     Increase in production tooling                          (239)      (222)      (344)
     Increase in prepaid expenses and other assets           (352)      (324)    (1,683)
     Increase (decrease) in accounts payable                1,130       (113)      (465)
     Increase (decrease) in accrued expenses                   27         (3)      (245)
     Increase in deferred revenue                             ---        ---          9
                                                          -------    -------    -------

          Net cash provided by operating activities         1,685      1,204      2,543
                                                          -------    -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchases of property, plant and equipment               (3,788)    (2,213)    (2,887)
                                                          -------    -------    -------

          Net cash used in investing activities            (3,788)    (2,213)    (2,887)
                                                          -------    -------    -------

</TABLE>


                  The accompanying notes are an integral part
                       of these consolidated statements.

                                       50
<PAGE>

                                CERADYNE, INC.
                                --------------

              CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
              -------------------------------------
                            (Amounts in thousands)
<TABLE>
<CAPTION>


                                                                 1999      1998       1997
                                                               --------   -------   --------
<S>                                                            <C>        <C>       <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                       $   182    $  310    $   270
  Borrowings on long-term debt                                     500       ---     (1,000)
  Payments on long-term debt                                       (42)      ---        ---
                                                               -------    ------    -------

      Net cash provided by (used in) financing activities          640       310       (730)
                                                               -------    ------    -------

Decrease in cash and cash equivalents                           (1,463)     (699)    (1,074)

  Cash and cash equivalents, beginning of period                 2,870     3,569      4,643
                                                               -------    ------    -------

  Cash and cash equivalents, end of period                     $ 1,407    $2,870    $ 3,569
                                                               -------    ------    -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:

  Interest paid                                                $    16    $  ---    $   134
                                                               =======    ======    =======
  Income taxes paid                                            $    39    $   10    $    33
                                                               =======    ======    =======

</TABLE>



                  The accompanying notes are an integral part
                       of these consolidated statements.

                                       51
<PAGE>

                                CERADYNE, INC.
                                --------------

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                               DECEMBER 31, 1999
                               -----------------

1.  Summary of Significant Accounting Policies
    ------------------------------------------

  a.  Principles of Consolidation and Nature of Operations
      ----------------------------------------------------

  The consolidated financial statements include the financial statements of
  Ceradyne, Inc. (a Delaware Corporation), and its subsidiaries.  Ceradyne, Inc.
  and its subsidiaries are collectively referred to herein as the Company.  All
  significant intercompany accounts and transactions have been eliminated.

  The Company develops, manufactures and markets advanced technical ceramic
  products and components for industrial, defense, consumer and microwave
  applications. The products are sold primarily to industrial, consumer, and
  defense concerns globally.

  b.  Cash and Cash Equivalents
      -------------------------

  The Company considers all highly liquid investments with an initial maturity
  of three months or less when purchased to be cash equivalents.

  c. Accounts Receivable
     -------------------

  The allowance for doubtful accounts includes management's estimate of the
  amount expected to be uncollectable on specific accounts and unidentified
  accounts included in accounts receivable.  In estimating the potential losses
  on specific accounts, management relies on in-house prepared analysis and
  review of other available information.  The amounts the Company will
  ultimately realize could differ from the amounts assumed in arriving at the
  allowance for doubtful accounts in the accompanying financial statements.

  d. Inventories
     -----------

  Inventories are valued at the lower of cost (first-in, first-out) or market.
  The write down of inventory for obsolete items is based on management's
  estimate of the amount considered obsolete based on specific reviews of
  inventory items.  In estimating the allowance, management relies on its
  knowledge of the industry as well as its current inventory levels.  The
  amounts the Company will ultimately realize could differ from amounts
  estimated by management.  Inventory costs include the cost of material, labor
  and manufacturing overhead.  The following is a summary of inventories by
  component:
<TABLE>
<CAPTION>

                          December 31,
                     -----------------------
                        1999         1998
                     ----------   ----------
<S>                  <C>          <C>
Raw materials        $4,454,000   $4,098,000
Work-in-process       3,198,000    2,413,000
Finished goods          800,000    1,009,000
                     ----------   ----------
                     $8,452,000   $7,520,000
                     ==========   ==========
</TABLE>

                                       52
<PAGE>

  e.  Property, Plant and Equipment
      -----------------------------

  Depreciation and amortization of property, plant and equipment are provided
  using the straight-line method over the following estimated useful lives:

          Buildings and improvements     20 years
          Machinery and equipment        3 to 12 years
          Leasehold improvements         Term of lease
          Office equipment               5 years

  Maintenance, repairs and minor renewals are charged to expense as incurred.
  Repairs and maintenance expense approximated $720,000, $729,000, and $708,000
  in 1999, 1998 and 1997, respectively.  Additions and improvements are
  capitalized.  When assets are disposed of, the applicable costs and
  accumulated depreciation and amortization are removed from the accounts and
  any resulting gain or loss is included in the results of operations.

  f.  Sales Recognition
      -----------------

  Sales are recorded as of the date shipments are made, or goods are accepted by
  customers for production contracts.

  g.  Deferred Revenue
      ----------------

  In October 1999, Ford Motor Company contributed $270,000 for the year 2000 to
  the Joint Product Development Program (see Note 9 on Page 64).  The Company
  will fully amortize this amount to revenue during 2000.  In 1998 and 1997,
  Ford Motor Company also contributed $270,000 for each year.  The Company has
  fully amortized these amounts to revenue during 1998 and 1999.

  h.  Net Income Per Share
      --------------------

  The Company accounts for net income per share in accordance with SFAS No. 128
  "Earnings Per Share".  Basic net income per share is computed by dividing
  income available to common stockholders by the weighted average number of
  common shares outstanding.  Diluted net income per share is computed by
  dividing income available to common stockholders by the weighted average
  number of common shares outstanding plus the effect of any dilutive stock
  options and common stock warrants using the treasury stock method.

                                       53
<PAGE>

  The following is a summary of the number of shares entering into the
  computation of net income per common and common equivalent share:
<TABLE>
<CAPTION>

                                                            December 31,
                                                  ---------------------------------
                                                    1999        1998        1997
                                                  ---------   ---------   ---------
<S>                                               <C>         <C>         <C>
     Weighted average number of
         shares outstanding                       8,070,225   8,005,000   7,931,000
     Dilutive stock options and common stock
         warrants                                   119,174      63,000     104,000
                                                  ---------   ---------   ---------

     Number of shares used in
         diluted computation                      8,189,399   8,068,000   8,035,000
                                                  =========   =========   =========
</TABLE>

  i.  Accounting for Long-Lived Assets
      --------------------------------

  As prescribed by Statement of Financial Accounting Standards (SFAS) No. 121,
  "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
  to be Disposed of," the Company assesses the recoverability of its long-lived
  assets (including goodwill) by determining whether the asset balance can be
  recovered over the remaining depreciation or amortization period through
  projected undiscounted future cash flows.  Cash flow projections, although
  subject to a degree of uncertainty, are based on trends of historical
  performance and management's estimate of future performance, giving
  consideration to existing and anticipated competitive and economic conditions.
  There were no impairment charges in any of the three years in the period ended
  December 31, 1999.

  j.  Deferred Start-up and Preproduction Engineering
      -----------------------------------------------

  In April 1998, the American Institute of Certified Public Accountants (AICPA)
  issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
  Activities", effective for fiscal years beginning after December 15, 1998.
  This statement requires cost of start-up activities and organization costs to
  be expensed as incurred.  Prior to the effective date, the Company incurred
  and amortized approximately $252,000 of deferred start-up costs related to the
  semiconductor product line during the year ended December 31, 1998.

  Effective for design and development costs incurred after December 31, 1999,
  the Emerging Issues Task Force (EITF) released issue No. 99-5, "Accounting for
  Pre-Production Costs Related to Long Term Supply Arrangements".  The task
  force reached a consensus that design and development costs for products to be
  sold under long term supply arrangement should be expenses as incurred.  The
  effect of adoption will be immaterial to the Company's financial statements.

  In 1998, the Company capitalized $188,000 in pre-production costs relating to
  a new government contract for the armor vest product line.  In November 1999,
  the company commenced shipments of the product and began to amortize these
  costs.  The remaining $172,000 as of December 31, 1999 will be amortized
  during the year 2000.

                                       54
<PAGE>

  k.  Use of Estimates
      ----------------

  The preparation of financial statements in accordance with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the financial statements.
  Actual results could differ from those estimates.

  l.  Engineering and Research
      ------------------------

  The costs associated with application engineering and internally-funded
  research are expensed as incurred and are included in cost of product sales or
  other operating expenses.  The Company established a new research and
  development department in 1998 to focus on new materials technology.  Costs
  associated with the research and development department were $597,000 as of
  December 31, 1999 compared to $344,000 in the prior year.  In addition, the
  Company has historically and continues to engage in application engineering
  and internally funded research to improve and reduce the cost of products and
  to develop new products.  Costs associated with the engineering department
  were approximately $281,000, $384,000 and $380,000 in 1999, 1998 and 1997,
  respectively.

  m.  Stock Based Compensation Plans
      ------------------------------

  Effective January 1, 1996, the Company adopted the disclosure provisions of
  SFAS No. 123, "Accounting for Stock-Based Compensation".  At a minimum, SFAS
  No. 123  requires the Company to disclose pro forma net income and earnings
  per share as if the fair value based accounting method of SFAS No. 123 had
  been used to account for stock-based compensation.  These disclosures are
  included in Note 7.

  n.  Fair Value of Financial Instruments
      -----------------------------------

  The carrying value of accounts receivable and trade payables approximates the
  fair value due to their short-term maturities.  The carrying value of the
  Company's line of credit is considered to approximate fair market value as the
  interest rates of these instruments are based predominately on variable
  reference rates.  The carrying value of the Company's long-term debt is a
  reasonable estimate of fair value as the rate of interest paid on the note
  approximates the current rate available for financing with similar terms and
  maturities.

  o.  Environmental Liabilities and Expenditures
      ------------------------------------------

  Accruals for environmental matters are recorded in operating expenses when it
  is probable that a liability has been incurred and the amount of the liability
  can be reasonably estimated.  In the fourth quarter of 1998, the Company
  recorded approximately $178,000 as an accrual for the written notification
  from the United States Environmental Protection Agency that the Company was a
  responsible party in the Superfund cleanup of the Casmalia Disposal Site in
  Santa Barbara County, CA.  The notification states that Ceradyne, along with
  approximately 10,000 other parties, have been designated as "de minimus" waste
  generators due to the relatively small quantities of their waste disposal.
  The Company properly disposed of this waste material in the 1970's and 1980's,
  however the Casmalia Disposal Site leaked into the water table.  Thus the
  waste generators must pay their share of the cost of the cleanup effort.
  After review and

                                       55
<PAGE>

  negotiation, the EPA reduced the charge to $112,000.  The amount was paid in
  full in December, 1999.

  p.  New Accounting Pronouncements
      -----------------------------

  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
  "Accounting for Derivative Instruments and Hedging Activities."  SFAS No. 133
  is effective for fiscal years beginning after June 15, 2000.  SFAS No. 133
  requires that all derivative instruments be recorded on the balance sheet at
  their fair value.  Currently, the Company does not have any instruments that
  would qualify as derivatives under SFAS No. 133.  Accordingly, the Company
  does not believe SFAS No. 133 will have a material impact on the Company's
  financial position, results of operations, or liquidity at the current time.

2. Debt and Bank Borrowing Arrangements
   ------------------------------------

In November, 1997 the Company entered into a revolving credit agreement with
Comerica Bank.  The credit facility amount remains at $4,000,000 as of year
ended December 31, 1999 and no collateral is required of the Company.  As of
December 31, 1999 there had been no borrowing under this credit facility.

Under a separate credit facility with Comerica Bank, the Company entered into a
$500,000 capital equipment loan agreement during the third quarter of 1999.  The
term of the loan is for 60 months with no prepayment penalty.  The equipment
serves as the collateral for the loan.

    Long Term Debt
    --------------

    Capital equipment loan bearing interest at            $ 458,000
    8.18% APR, as of December 31, 1999.
    Payable in monthly installments of $8,333
    expiring July 2004.

    Less:  current portion                                 (100,000)
                                                           --------
    Long term debt                                        $ 358,000
                                                           ========
3.  Income Taxes
    ------------

The provision (benefit) for income taxes is comprised of the following for the
year ended December 31:

                        1999       1998         1997
                        ----       ----         ----

    Current           $(44,000)   $10,000     $    33,000
    Deferred               ---        ---      (1,708,000)
                      --------    -------     -----------
                      $(44,000)   $10,000     $(1,675,000)
                      ========    =======     ===========

                                       56
<PAGE>

The Company's deferred tax asset at December 31, 1999 relates primarily to its
tax net operating loss carryforwards, which total approximately $10.6 million
and expire as follows:

      2003               $   634,000
      2004                 3,015,000
      2005                   161,000
      2006                   218,000
      2007                 1,093,000
      2008                 2,050,000
      2009                 1,828,000
      2012                 1,620,000
                         -----------
                         $10,619,000
                         ===========

The components of the Company's deferred tax asset as of December 31, 1999 and
1998 are as follows:

                                                   December 31,
                                                   ------------
                                               1999           1998
                                               ----           ----
 Inventory adjustments                     $   264,000    $   246,000
 Contingency reserves                              ---         71,000
 Vacation accrual                              104,000         91,000
 Bad debt allowance                             16,000         36,000
 Net operating loss and tax credit
  carryforwards                              4,248,000      4,961,000
 Other                                          67,000        (81,000)
                                           -----------    -----------
                                             4,699,000      5,324,000
 Valuation allowance                        (2,991,000)    (3,699,000)
                                           -----------    -----------
   Net deferred tax asset                  $ 1,708,000    $ 1,625,000
                                           ===========    ===========

The deferred tax asset is classified in other assets at December 31, 1999 and
1998.  Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax
asset as reduced by the valuation allowance.

The effective income tax rate for the years ended December 31, 1999, 1998 and
1997 differs from the Federal statutory income tax rate due to the following
items:
<TABLE>
<CAPTION>

                                                             December 31,
                                                             ------------
                                                   1999          1998          1997
                                                   ----          ----          ----
  <S>                                         <C>            <C>         <C>

  Income before taxes                         $1,559,000     $292,000    $   375,000
                                              ----------     --------    -----------

  Provision for income taxes at federal
     statutory rate                              530,060       99,280        127,500
  State income taxes                              75,612       14,162         18,188
  Reduction of valuation allowance              (708,000)     (15,000)    (1,846,000)
  Other                                           58,328      (88,442)        25,312
                                              ----------     --------    -----------
  Provision (benefit) for income taxes        $  (44,000)    $ 10,000    $(1,675,000)
                                              ==========     ========    ===========
  Effective tax rate                              (2.82)%        3.42%      (446.67)%
                                              ==========     ========    ===========
</TABLE>

                                       57
<PAGE>

4. Commitments and Contingencies
   -----------------------------

   a.  Operating Lease Obligations
       ---------------------------

   The Company leases certain of its manufacturing facilities under
   noncancelable operating leases expiring at various dates through October
   2005.  The Company incurred rental expense under these leases of $653,433,
   $667,000 and $620,000 in 1999, 1998 and 1997, respectively.  The approximate
   minimum rental commitments required under existing noncancelable leases as of
   December 31, 1999 are as follows:

                    2000      $  648,456
                    2001         673,160
                    2002         698,819
                    2003         725,461
                    2004         753,129
                    2005         781,870
                              ----------
                              $4,280,895
                              ==========

   b.  Employment Agreement
       --------------------

   The Company has an employment agreement with the Chief Executive Officer
   which expires on July 5, 2001.  In addition to a base salary, the agreement
   provides for a bonus to be determined by the Compensation Committee of the
   Board of Directors.  No maximum compensation limit exists. Compensation
   expense pursuant to this agreement in 1999, 1998 and 1997 was $256,112,
   $231,111 and $232,964, respectively.

   c.  Legal Proceedings
       -----------------

   The Company is, from time to time, involved in various legal and other
   proceedings that relate to the ordinary course of operating its business,
   including, but not limited to, employment-related actions and workers'
   compensation claims.

   In October 1995, February 1997, August 1997, February 1999, and December
   1999, the Company, along with others, was served with six different
   complaints that were filed by nine former employees of one of the Company's
   customers, and eight spouses.  The complaints, filed in the United States
   District Court, Eastern District of Tennessee, allege that the customers'
   employees contracted chronic beryllium disease as a result of their exposure
   to beryllium-containing products sold by Ceradyne and others.  One complaint
   seeks compensatory damages in the amount of $3.0 million for the four
   husbands, $1.0 million for the four spouses, and punitive damages in the
   amount of $5.0 million.  Four other complaints each seek compensatory damages
   in the amount of $5.0 million for four husbands, $1.0 million for the
   spouses, and punitive damages in the amount of $10.0 million.  The final
   complaint seeks compensatory damages in the amount of $5.0 million for an
   individual and punitive damages in the amount of $10.0 million.  The Company
   believes that the plaintiffs' claims are without merit and that the
   resolution of these matters will not have a material adverse effect on the
   financial condition or operations of the Company.  Defense of these cases has
   been tendered to the Company's insurance carriers, some of which are
   providing a defense subject to a reservation of rights.  There can be no
   assurances, however, that these claims will

                                       58
<PAGE>

   be covered by insurance, or that, if covered, the amount of insurance will
   be sufficient to cover any potential judgments.

   We were notified by the United States Environmental Protection Agency in
   December, 1998 that Ceradyne is a responsible party in the federal Superfund
   cleanup of the Casmalia Disposal Site located in Santa Barbara County,
   California. The notification states that Ceradyne, along with approximately
   10,000 other companies, has been designated as a de minimus waste generator
   due to the relatively small quantity of the waste disposed at the Casmalia
   Disposal Site. We properly disposed of this waste material in the 1970s and
   1980s. However, waste materials disposed at the Casmalia Disposal Site have
   leaked into the water table. Under federal law, all parties who have disposed
   of waste materials at the Casmalia Site must pay their proportional share of
   the cost of the cleanup effort. In the fourth quarter of 1998, we recorded an
   expense in the amount of $0.2 million as the estimated amount of our share of
   the cleanup costs. After negotiations with the EPA, the final settlement was
   $0.1 million and was paid in December, 1999.

5. Disclosure About Segments of Enterprise and Related Information
   ---------------------------------------------------------------

The Company serves its markets and manages its business through three divisions,
each of which has its own manufacturing facilities and administrative and
selling functions.  The Company's Advanced Ceramic Operations, located in Costa
Mesa, California, primarily produces armor and orthodontic products, components
for semiconductor equipment, and houses the Company's SRBSN research and
development activities.  The Company's cathode development and production are
handled through its Semicon Associates division located in Lexington, Kentucky.
Fused silica products, including missile radomes, are produced at the Company's
Thermo Materials division located in Scottdale, Georgia.

Ceradyne's manufacturing structure is summarized in the following table:

<TABLE>
<CAPTION>
===================================================================================================================================
FACILITY LOCATION                                                                            PRODUCTS
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>
Advanced Ceramic Operations                                                     . Semiconductor Equipment Components
Costa Mesa, California                                                          . Lightweight ceramic armor
  Approximately 74,000 square feet                                              . Orthodontic ceramic brackets
                                                                                . Ceralloy(R) 147 SRBSN wear parts
                                                                                . Precision ceramics
                                                                                . Ceralloy(R) 147 SRBSN diesel/automotive
                                                                                    engine parts (R&D)

Semicon Associates                                                              . Microwave ceramic-impregnated dispenser cathodes
Lexington, Kentucky                                                             . Ion laser ceramic-impregnated dispenser cathodes
  Approximately 35,000 square feet                                              . Samarium cobalt magnets

Thermo Materials                                                                . Glass tempering rolls (fused silica ceramics)
Scottdale, Georgia                                                              . Metallurgical tooling (fused silica ceramics)
  Approximately 85,000 square feet                                              . Missile radomes (fused silica ceramics)
                                                                                . Castable and other fused silica product
====================================================================================================================================

</TABLE>

                                       59
<PAGE>

                                Ceradyne, Inc.
              Segment Statement of Operations for the Years Ended
                       December 31, 1999, 1998, and 1997
                            (amounts in thousands)

<TABLE>
<CAPTION>

                   Advanced Ceramic Ops                Semicon  Associates               Thermo Materials                TOTAL
                   --------------------                -------------------               ----------------                -----
------------------------------------------------------------------------------------------------------------------------------------

                   1999      1998      1997      1999      1998       1997      1999     1998     1997     1999      1998      1997
------------------------------------------------------------------------------------------------------------------------------------

<S>             <C>       <C>       <C>       <C>      <C>        <C>        <C>      <C>      <C>      <C>       <C>       <C>
Revenue from    $17,839   $14,176   $17,202   $6,385    $5,995    $ 6,134    $6,158   $6,108   $5,357   $30,382   $26,279   $28,693
External        -------   -------   -------   ------    ------    -------    ------   ------   ------   -------   -------   -------
Customers

Depreciation    $ 1,272   $   992   $   843   $  347    $  301    $   293    $  216   $  212   $  225   $ 1,835   $ 1,505   $ 1,361
and             -------   -------   -------   ------    ------    -------    ------   ------   ------   -------   -------   -------
Amortization

Segment Income  $   762   $    37   $ 2,356   $  395    $ (114)   $(2,045)   $  402   $  369   $   64   $ 1,559   $   292   $   375
(loss) before   -------   -------   -------   ------    ------    -------    ------   ------   ------   -------   -------   -------
provision
(benefit) for
income  taxes

Segment Assets  $23,196   $19,960   $19,403   $5,877    $6,398    $ 6,362    $3,820   $3,135   $3,252   $32,893   $29,493   $29,017
                -------   -------   -------   ------    ------    -------    ------   ------   ------   -------   -------   -------

Expenditures    $ 2,989   $ 1,827   $ 2,306   $  322    $  272    $   479    $  477   $  114   $  102   $ 3,788   $ 2,213   $ 2,887
for Segment     -------   -------   -------   ------    ------    -------    ------   ------   ------   -------   -------   -------
Assets of PP&E
               --------------------------------------------------------------------------------------------------------------------
</TABLE>

                    Segment Statement for Net Sales by Area
                              for the Years Ended
                       December 31, 1999, 1998, and 1997
                                    (in %)
<TABLE>
<CAPTION>

                              Advanced Ceramic Ops        Semicon Associates       Thermo Materials             TOTAL
                              --------------------        ------------------       ----------------             -----
------------------------------------------------------------------------------------------------------------------------------------

                      1999           1998       1997     1999    1998    1997    1999    1998    1997    1999    1998    1997
------------------------------------------------------------------------------------------------------------------------------------

<S>               <C>             <C>           <C>      <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
U.S. Net Sales          54%       47%           53%      18%     18%     14%     17%     19%     13%     89%     84%     80%

Western Europe           3%       4%             4%       2%      3%      3%      1%      2%      3%      6%      9%     10%
Net Sales

Asia Net Sales           1%       1%             1%       1%      2%      4%      2%      1%    ---       4%      4%      5%

Israel Net             ---        2%             1%      ---     ---     ---     ---     ---    ---     ---       2%      1%
Sales

Canada Net               1%     ---            ---       ---     ---     ---     ---       1%     1%      1%      1%      1%
Sales

Other                  ---      ---              1%      ---     ---     ---     ---     ---      2%    ---     ---       3%
                      ----     ----           ----      ----    ----     ----   ----    ----    ----   ----    ----    ----

Total Net Sales         59%      54%            60%      21%     23%     21%     20%      23%    19%    100%    100%    100%
                      ====     ====           ====      ====    ====     ====   ====    ====    ====   ====    ====    ====
               ---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      60
<PAGE>

For fiscal year 1999, one customer accounted for approximately 18% of net
consolidated sales.  For fiscal year 1998, two customers accounted for
approximately 16% and 11% of net consolidated sales.  For fiscal year 1997, one
customer accounted for approximately 17% of net consolidated sales.

6. Comprehensive Income
   --------------------

Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established standards for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in stockholder's equity
except those resulting from investments by and distributions to owners.
Currently, no difference exists between the Company's net income and its
comprehensive net income.

7. Stock Options
   -------------

The Company has a stock option plan, the 1994 Stock Incentive Plan and an
employee stock purchase plan, the 1995 Employee Stock Purchase Plan.  The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.  Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:

                                                 1999        1998        1997
                                                 ----        ----        ----
  Net income:                   As reported   $1,603,000   $282,000   $2,050,000
                                Pro forma     $1,276,320   $ 97,371   $1,888,000

  Basic income per share        As reported   $      .20   $    .04   $      .26
                                Pro forma            .16        .01          .24

  Diluted income per share      As reported   $      .20   $    .04   $      .26
                                Pro forma            .16        .01          .23

Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 1999, 1998 and 1997 pro forma net income include immaterial
amounts related to the purchase discount offered under the 1995 Employee Stock
Purchase Plan.

The Company may sell up to 100,000 shares of stock to its full-time employees
under the 1995 Employee Stock Purchase Plan.  The Company has sold 26,793,
24,162 and 22,004 shares in 1999, 1998 and 1997, respectively, under the 1995
Employee Stock Purchase Plan.  Employees may purchase shares at the lower of 85
percent of the quoted market value of the shares as determined on the first or
last day of the plan year.  The weighted average fair value of shares sold in
1999, 1998 and 1997 was $3.876, $3.93 and $4.63, respectively.

The Company may grant options for up to 650,000 shares under the 1994 Stock
Incentive Plan.  The Company has granted options for 757,700 and has had
cancellations of 125,205 shares through December 31, 1999.  Options are granted
at or above the fair market value at the date of grant and

                                       61
<PAGE>

generally become exercisable over a five-year period.

A summary of the status of the Company's stock option plan at December 31, 1997,
1998 and 1999 and changes during the years then ended is presented in the table
and narrative below:

                                                    Weighted Average
                                          Shares     Exercise  Price
                                         --------   -----------------
OUTSTANDING, December 31, 1996           384,050              $ 3.56
                                         =======              ======

     Granted                             139,500                6.14
     Exercised                           (23,900)               2.85
     Canceled                            (33,800)               4.98
                                         -------              ------
     OUTSTANDING, December 31, 1997      465,850              $ 4.26
                                         =======              ======

     Granted                             128,500              $ 4.41
     Exercised                           (41,200)              (2.75)
     Canceled                            (55,000)              (5.92)
                                         -------              ------
     OUTSTANDING, December 31, 1998      498,150              $ 4.24
                                         =======              ======

     Granted                             151,000              $ 3.39
     Exercised                           (10,200)              (2.63)
     Canceled                            (10,400)              (4.66)
                                         -------              ------
     OUTSTANDING, December 31, 1999      628,550              $ 4.06
                                         =======              ======

Of the 628,550 options outstanding at December 31, 1999, 402,850 have exercise
prices between $2.00 and $4.375, with a weighted average exercise price of
$3.11, and a weighted average remaining contractual life of five years.  The
remaining 225,700 options have exercise prices between $4.75 and $7.375, with a
weighted average exercise price of $5.76, and a weighted average remaining
contractual life of nine years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998, and 1997, respectively:  risk free
interest rates of 6.51, 5.40 and 6.38 percent; expected life for 1999, 1998 and
1997 of 7 years; expected volatility of 65.06, 94.87 and 57.43 percent.  The
assumed dividend yield in 1999, 1998 and 1997 is zero percent.

8. Supplemental Retirement Plan
   ----------------------------

In December 1988 the Board of Directors of the Company approved the adoption of
a supplemental retirement plan (Ceradyne SMART 401(k) Plan) in which
substantially all employees are eligible to participate after completing 90 days
of employment.  Participation in the Plan is voluntary.  An employee may elect
to contribute up to fifteen percent (15% or the maximum deferred tax amount of
$10,000 in 1999, whichever is less) of the employee's pretax compensation as a
basic contribution.  The exception to this rule are the highly compensated
employees ($80,000 and above) who are limited to 7% of pretax compensation as a
basic contribution.  The Company may contribute any amount which the Board of
Directors annually determines appropriate.  Company contributions fully vest and
are nonforfeitable after the participant has completed five years of service.
During the years ended December 31, 1999, 1998, and 1997, the related Company
contribution was approximately $14,300, $42,000 and $116,000,  respectively.

                                       62
<PAGE>

The Company's contribution is in the form of shares of its common stock.  The
number of shares to be contributed will be determined by dividing the total
Company match for the Plan year by the higher of the market value per share of
common stock as of the end of that Plan year (December 31), or the audited book
value per share of common stock as of the end of that Plan year.  The
participants' cash contributions may be invested, at their discretion, in one or
all of the following:  (1) Fixed Income Fund, (2) Bond and Mortgage Fund, (3)
International Stock Fund, or (4) Equity Fund.  The member can elect to allocate
the accumulated and future contributions to their accounts among these funds in
increments of 10 percent.

The Company has reserved 250,000 shares of its common stock for possible
issuance under the Plan.  At December 31, 1999, 121,949 shares were available
for issuance under the Plan.

9. Joint Venture and Joint Development Agreement
   ---------------------------------------------

On March 11, 1986, the Company sold 526,316 shares of its common stock to Ford
Motor Company (Ford) for a gross sales price of $10,000,000.  In addition, Ford
and the Company formed a joint venture, Ceradyne Advanced Products, Inc. (CAPI),
in which the Company acquired a 20 percent interest for $200,000.  Ford
contributed certain technology in exchange for its 80 percent interest in the
joint venture.  The Company granted Ford an option to put Ford's 80 percent
interest in the joint venture to the Company in exchange for 608,020 shares of
the Company's common stock.  Ford granted the Company an option to call Ford's
80 percent interest in the joint venture in exchange for 680,983 shares of the
Company's common stock.

On February 13, 1988, the Company exercised its call option and issued 680,983
shares of its common stock to Ford.  The value of the shares issued ($2,043,000)
was allocated to the technology acquired and is being amortized over a 20 year
period utilizing the purchase method of accounting.

Ford and the Company have also entered into a joint development program to
develop a prototype production facility to produce ceramics with automotive
applications.  Under the terms of the joint development agreement, Ford and the
Company share equally in the cost of this project.  For the years ending
December 31, 1999, 1998 and 1997, Ford has contributed $270,000 in each year
which have been reflected as revenue in the accompanying consolidated financial
statements.

10. Interim Financial Information (unaudited)
    -----------------------------------------

The results by quarter for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>

                                            Quarter Ending
                                            --------------
                       March 31,       June 30,    September 30,   December 31,
                          1999           1999          1999            1999
                     --------------   ----------   -------------   ------------
<S>                  <C>              <C>          <C>             <C>

 Net sales               $6,305,000   $7,331,000      $7,810,000     $8,936,000
 Net income                  48,000      401,000         496,000        658,000
 Diluted income
  per share-             $      .01   $      .05      $      .06     $      .08
                         ==========   ==========      ==========     ==========
</TABLE>

                                       63
<PAGE>

<TABLE>
<CAPTION>

                                         Quarter Ending
                                         --------------
                     March 31,     June 30,    September 30,   December 31,
                        1998         1998          1998            1998
                     ----------   ----------   -------------   -------------
<S>                  <C>          <C>          <C>             <C>

 Net sales           $7,341,000   $6,342,000      $6,290,000     $6,305,000
 Net income             483,000      326,000          44,000       (571,000)
 Diluted income
  per share-         $      .06   $      .04      $      .01     $     (.07)
                     ==========   ==========      ==========     ==========

</TABLE>

                                       64
<PAGE>

               SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
               -------------------------------------------------

                             (Amounts in thousands)
<TABLE>
<CAPTION>


                          Balance    Charged                 Balance
                            at       to Costs                  at
                         Beginning     and                   End of
Description              of Period   Expenses   Deductions   Period
-----------              ---------   --------   ----------   ------
<S>                      <C>         <C>        <C>          <C>

For the Year Ending
December 31, 1999:
------------------

Allowance for
doubtful
accounts receivable           $ 92       $ 77         $130      $39
                              ====       ====         ====      ===

For the Year Ending
December 31, 1998:
------------------

Allowance for
doubtful
accounts receivable           $179       $ 55         $142      $92
                              ====       ====         ====      ===

For the Year Ending
December 31, 1997:
------------------

Allowance for
doubtful
accounts receivable           $125       $134         $ 80     $179
                              ====       ====         ====     ====
</TABLE>

                                       65
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

March 30, 2000                CERADYNE, INC.

                                  By /s/ Joel P. Moskowitz
                                     ------------------------
                                      Joel P. Moskowitz
                                      Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ Joel P. Moskowitz           Chairman of the Board,     March 30, 2000
----------------------------    Chief Executive Officer,
Joel P. Moskowitz               President and Director
                                (Principle executive
                                officer)

/s/ Howard F. George            Chief Financial Officer    March 30, 2000
----------------------------    (Principle financial
 Howard F. George               and accounting officer)

/s/ Leonard M. Allenstein       Director                   March 30, 2000
----------------------------
 Leonard M. Allenstein

/s/ Richard A. Alliegro         Director                   March 30, 2000
----------------------------
 Richard A. Alliegro

/s/ Frank Edelstein             Director                   March 30, 2000
----------------------------
 Frank Edelstein

/s/ Peter Beardmore             Director                   March 30, 2000
----------------------------
 Peter Beardmore

/s/ Melvin A. Shader            Director                   March 30, 2000
----------------------------
 Melvin A. Shader

/s/ Milton L. Lohr              Director                   March 30, 2000
----------------------------
 Milton L. Lohr

                                       66